Financial Reporting in Hong Kong. Illustrative Financial Statements and Disclosure Checklist 2007

Transcription

1 Financial Reporting in Hong Kong Illustrative Financial Statements and Disclosure Checklist 2007

2

3 Financial Reporting in Hong Kong Illustrative Financial Statements and Disclosure Checklist 2007

4 2008 Deloitte Touche Tohmatsu First Edition All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording typing or information retrieval systems) without the written permission of the publisher. Disclaimer This publication is sold with the understanding that (1) the author and editor are not responsible for the results of any actions taken on the basis of information in this work, nor for any errors or omissions; and (2) the publisher is not engaged in rendering legal, accounting or other professional services. The publisher, the author and editor, expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this publication. If legal advice or other expert assistance is required, the service of a competent professional person should be sought. Published by CCH Hong Kong Limited Printed by Wellfit Production & Printing Limited ISBN: ii

5 About CCH Hong Kong Limited CCH Hong Kong Limited is a member of Wolters Kluwer group, the world s leading publisher for professionals. CCH Hong Kong Limited provides its subscribers with the highest standard of reporting for which the CCH group of companies has an established reputation worldwide. CCH publications keep business managers, accountants, lawyers and other business professionals up-to-date with developments in a wide range of topics including taxation, company law, securities law, business law and employment law. The essence of CCH publications is accuracy, authority, practicability and ease of reference achieved by the presentation of information in a highly readable form and by the use of comprehensive indexes and other locators. CCH Hong Kong Limited publishes a range of print and electronic reporting services and publications on taxation, company, business and employment law in China and Hong Kong. Our range of publications will continue to expand to serve the needs of subscribers in the region. For enquiries contact your local CCH office. CCH Hong Kong Limited Room 1608, 16/F, Harcourt House, 39 Gloucester Road, Wanchai, Hong Kong Customer Service Hotline: Facsimile: address: support@cch.com.hk Website: Beijing Wolters Kluwer Asia Pacific Information Technology Co. Ltd Suite 1203 CITIC Building, 19 Jianguomenwai Dajie, Biejing Telephone: (8610) Customer Service Hotline: (8610) Facsimile: (8610) address: support@cchchina.com.cn Website: CCH Asia Pte Limited (Registration No: K) 11 Keppel Road, #11-01 RCL Centre, Singapore Telephone: (86) Customer Service Hotline: Facsimile: address: support@cch.com.sg Website: Commerce Clearing House (Malaysia) Sdn Bhd (Registration No: M) Suite 9.3, 9th Floor Menara Weld, 76 Jalan Raja Chulan, Kuala Lumpur, Malaysia Telephone: (603) Customer Service Hotline: Facsimile: address: support@cch.com.my Website: CCH Japan Limited Tokyo, Japan CCH Australia Limited Sydney, Australia CCH New Zealand Limited Auckland, New Zealand CCH Incorporated Chicago, USA CCH Canadian Limited Toronto, Canada CCH Editions Limited Surrey, England Kluwer Law International Alphen aan den Rijn, The Netherlands iii

6

7 About Deloitte Touche Tohmatsu Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organisation of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in over 140 countries. With access to the deep intellectual capital of approximately 150,000 people worldwide, Deloitte delivers services in four professional areas - audit, tax, consulting, and financial advisory services - and serves more than 80 percent of the world's largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names Deloitte, Deloitte & Touche, Deloitte Touche Tohmatsu, or other related names. About Deloitte's China practice Deloitte's China practice provides services through a number of legal entities and those entities are members of Deloitte Touche Tohmatsu (Swiss Verein). We are one of the leading professional services providers in the Chinese Mainland, Hong Kong SAR and Macau SAR. We have 7,000 people in ten offices including Beijing, Dalian, Guangzhou, Hong Kong, Macau, Nanjing, Shanghai, Shenzhen, Suzhou and Tianjin. As early as 1917, we opened an office in Shanghai. Backed by our global network, we deliver a full range of audit, tax, consulting and financial advisory services to national, multinational and growth enterprise clients in China. We have considerable experience in China and have been a significant contributor to the development of China's accounting standards, taxation system and local professional accountants. We also provide services to around one-third of all companies listed on the Stock Exchange of Hong Kong. For more information, please visit our website at v

8 Contact details for Deloitte s China Practice Beijing Deloitte Touche Tohmatsu CPA Ltd. Beijing Branch 8/F Office Tower W2 The Towers, Oriental Plaza 1 East Chang An Avenue Beijing , PRC Tel: Fax: Dalian Deloitte Touche Tohmatsu CPA Ltd. Dalian Branch Room 1503 Senmao Building 147 Zhongshan Road Dalian , PRC Tel: Fax: Guangzhou Deloitte Touche Tohmatsu CPA Ltd. Guangzhou Branch 26/F Teemtower 208 Tianhe Road Guangzhou , PRC Tel: Fax: / 0121 Hong Kong SAR Deloitte Touche Tohmatsu 35/F One Pacific Place 88 Queensway Hong Kong Tel: Fax: Macau SAR Deloitte Touche Tohmatsu 19/F The Macau Square Apartment H-N 43-53A Av. do Infante D. Henrique Macau Tel: Fax: Nanjing Deloitte Touche Tohmatsu CPA Ltd. Nanjing Branch Room B, 11/F Golden Eagle Plaza 89 Hanzhong Road Nanjing , PRC Tel: Fax: Shanghai Deloitte Touche Tohmatsu CPA Ltd. 30/F Bund Center 222 Yan An Road East Shanghai , PRC Tel: Fax: Shenzhen Deloitte Touche Tohmatsu CPA Ltd. Shenzhen Branch 13/F China Resources Building 5001 Shennan Road East Shenzhen , PRC Tel: Fax: Suzhou Deloitte Business Advisory Services (Shanghai) Limited Suzhou Branch Suite 908, Century Financial Tower 1 Suhua Road, Industrial Park Suzhou , PRC Tel: Fax: Tianjin Deloitte Touche Tohmatsu CPA Ltd. Tianjin Branch 30/F The Exchange North Tower 189 Nanjing Road Heping District Tianjin , PRC Tel: Fax: vi

9 Foreword Welcome to the 2007 edition of Hong Kong Financial Reporting Standards Illustrative Financial Statements and Disclosure Checklist This publication includes an illustrative 2007 annual report issued by a fictitious listed company, a presentation and disclosure checklist for 2007 and a section which gives a summary of the key changes to HKFRSs in issue as of 8 January 2008 together with a brief update on Listing Rules. With the promise by the International Accounting Standards Board to provide a stable platform until 2009, the new and revised standards, amendments and interpretations that impact reporting entities in 2007 is not expected to be significant except for the disclosure requirements under HKFRS 7 Financial Instruments: Disclosures and the related amendment to HKAS 1 Presentation of Financial Statements in relation to capital disclosures. In view of the complexity and pervasiveness of HKFRS 7, a separate section in this publication has been devoted to providing detailed guidance and illustrative examples on the disclosure requirements under HKFRS 7. However, while the disclosure burden has increased substantially in recent years, regulators and reviewers have found that there is a tendency for preparers to use boiler-plate type disclosures irrespective of their relevance to the specific entity s financial information. While these illustrative financial statements provide guidance on disclosure, it is essential for preparers to tailor the descriptions according to the specific circumstances of the entity, in particular, those describing accounting policies, key sources of estimation uncertainties and financial instruments risk disclosures. Due consideration needs to be given not only to these changes but also the options to early adopt those standards, amendments or interpretations issued but not yet effective. I would also strongly encourage preparers to respond to the challenge of producing annual reports that are clear and unambiguous that are tailored specifically to the circumstances of the entity. I hope this publication together with our recent publication Financial Reporting in Hong Kong will help you navigate through the increasingly complex and changing financial reporting requirements in Hong Kong. In addition, please continue to keep up to date with the new international developments that will shape Hong Kong Standard setting in future via our IAS Plus website ( Stephen Taylor Partner Deloitte Touche Tohmatsu, January

10

11 Contents Page What s new for 2007 financial statements and beyond? I. Hong Kong Financial Reporting Standards 1. Overview of new and revised standards, amendments and interpretations effective for annual periods beginning on 1 March 2006 or after 5 2. HKFRS 7 Financial Instruments: Disclosures 13 II. Listing Rules 44 Illustrative Financial Statements 45 Presentation and Disclosure Checklist 177 3

12 Abbreviations AG = Accounting Guideline issued by the HKICPA Alt = Alternative App = Appendix to the Listing Rules EPS = Earnings per Share GEM = Growth Enterprise Market of the SEHK GR = Rules Governing the Listing of Securities on the GEM (the GEM Rules) HKAS(s) = Hong Kong Accounting Standard(s) issued by the HKICPA HKFRS(s) = Hong Kong Financial Reporting Standard(s) issued by the HKICPA HIBOR = Hong Kong Inter-Bank Offer Rate HKICPA = Hong Kong Institute of Certified Public Accountants HK-Int = HK Interpretation HK (IFRIC)-Int = HK (IFRIC) Interpretation HKSA(s) = Hong Kong Standard(s) on Auditing issued by the HKICPA HK (SIC)-Int = HK (SIC) Interpretation IAS(s) = International Accounting Standard(s) IASB = International Accounting Standards Board IFRS(s) = International Financial Reporting Standard(s) IFRIC = International Financial Reporting Interpretations Committee of the IASB (also refers to individual interpretations issued by IFRIC) Preface = Preface to Hong Kong Standards on Quality Control, Auditing, Assurance and Related Services LR = Rules Governing the Listing of Securities on the SEHK (the Listing Rules) MD&A = Management Discussion and Analysis PN = Practice Note to the Listing Rules s = Section Reference, Hong Kong Companies Ordinance Sch 10 = Companies Ordinance, Tenth Schedule SFO = Securities and Futures Ordinance SEHK = The Stock Exchange of Hong Kong Limited 4

13 What s new for 2007 financial statements and beyond?

14

15 What s new for 2007 financial statements and beyond? I. Hong Kong Financial Reporting Standards Introduction This section outlines all new and revised standards, amendment and interpretations (the New HKFRSs ) effective for annual periods beginning on 1 March 2006 or after issued by the HKICPA as at 8 January 2008, so as to provide readers with a convenient reference when considering their implementation. Of the New HKFRSs which are effective in the current reporting period, the most significant changes to financial reporting will be due to the coming into effect of HKFRS 7 Financial Instruments: Disclosures. Accordingly, we have devoted section 2 of this publication to describe and discuss in detail the disclosure requirements of HKFRS 7. In July 2006, the IASB acknowledged that entities adopting IFRSs have undergone a period of enormous change in In order to provide a further period of stability while the changes are fully absorbed by reporting entities, the IASB has made a commitment not to require the adoption of new standards under development or any major amendments to existing standards before 1 January Although entities are expected to have some breathing space subsequent to application of IFRS 7 and IAS 1 (Amendment), we expect that the number of interpretations issued by the IFRIC will increase. Such interpretations, and minor amendments to standards, may be effective before Since HKFRSs became fully harmonized with IFRSs on 1 January 2005, this will mean that the HKICPA will follow suit. New or revised standards released subsequent to the issuance of HKFRS 7 and HKAS 1 (Amendment) are effective in year 2009, whilst a number of interpretations are effective before Entities will generally be permitted to adopt a Standard or an Interpretation on a voluntary basis before their effective dates. Where a Standard or Interpretation is adopted in advance of its effective date, disclosure of that fact is generally required. Even where there is no intention to implement a Standard or an Interpretation in advance of its effective date, entities need to be aware of new Standard or Interpretation as they are issued, in order to comply with the requirement included in HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to disclose in their financial statements the potential impact of the Standard or Interpretation in issue but not yet effective. 5

16 1. Overview of new and revised standards, amendments and interpretations effective for annual periods beginning on 1 March 2006 or after New standard Effective for accounting periods beginning on or after: HKFRS 7 Financial Instruments: Disclosures 1 January 2007 HKFRS 8 Operating Segments 1 January 2009 Amendment to standard Amendment to HKAS 1 Presentation of Financial Statements - Capital Disclosures Effective for accounting periods beginning on or after: 1 January 2007 Revised standards Effective for accounting periods beginning on or after: HKAS 23 (Revised) Borrowing Costs 1 January 2009 HKAS 1 (Revised) Presentation of Financial Statements 1 January 2009 New interpretations HK (IFRIC) - Int 7 Applying the Restatement Approach under HKAS 29, Financial Reporting in Hyperinflationary Economies Effective for accounting periods beginning on or after: 1 March 2006 HK (IFRIC) - Int 8 Scope of HKFRS 2 1 May 2006 HK (IFRIC) - Int 9 Reassessment of Embedded Derivatives 1 June 2006 HK (IFRIC) - Int 10 Interim Financial Reporting and Impairment 1 November 2006 HK (IFRIC) - Int 11 HKFRS 2 - Group and Treasury Share Transactions 1 March 2007 HK (IFRIC) - Int 12 Service Concession Arrangements 1 January 2008 HK (IFRIC) - Int 13 Customer Loyalty Programmes 1 July 2008 HK (IFRIC) - Int 14 HKAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction 1 January

17 Summaries and potential impacts A high level overview of the changes to HKFRSs which are effective for annual periods beginning on 1 March 2006 or after and the potential impacts thereof are summarised below. Changes and potential impacts highlighted are not exhaustive. There are numerous other changes (covering less significant recognition and measurement, and presentation and disclosure changes) that are not discussed below and may affect some entities. A detailed review of the new, revised and amended HKFRSs is recommended in order to identify changes specific to a particular reporting entity. 1.1 HKFRS 7 Financial Instruments: Disclosures (effective for annual periods beginning on or after 1 January 2007) HKFRS 7: adds new disclosures about financial instruments to those currently required by HKAS 32 Financial Instruments: Presentation and Disclosure; replaces the disclosure requirements currently imposed on financial institutions by HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions; and pulls all of those financial instrument disclosures under HKAS 30 and HKAS 32 together in a new combined standard. HKFRS 7 deals with the disclosure requirements in relation to all risks arising from financial instruments (with limited exemptions), and applies to any entity that holds financial instruments. The level of disclosure required depends on the extent of the entity s use of financial instruments and its exposure to financial risk. HKFRS 7 retains many of the disclosure requirements currently within HKAS 32 and HKAS 30. However, there have been some editorial changes to the existing requirements as well as some additional disclosure requirements added. The overriding objective is that preparers should provide disclosures that enhance a user s understanding of the entity s exposures to financial risks and how the entity manages those risks. To this end, HKFRS 7 requires an entity to disclose: information on the significance of financial instruments to the entity s financial position and performance; the nature and extent of risk exposures arising from financial instruments (quantitative disclosures); and the approach taken in managing those risks (qualitative disclosures). HKFRS 7 does not affect only financial institutions. All entities have some form of financial instruments on their balance sheets (for instance trade receivables, payables and loans). The time and effort required to collate and draft all of these disclosures (including those for comparative periods) can be rather substantial. Because of the significance of the changes to financial reporting, we have included in section 2 below a more detailed discussion highlighting the disclosure requirements of HKFRS HKFRS 8 Operating Segments (effective for annual periods beginning on or after 1 January 2009) requires an entity to report financial and descriptive information about its reportable segments, which are operating segments or aggregations of operating segments that meet specified criteria; operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance; if under HKAS 14 an entity identified its primary segments on the basis of the reports provided to the person whom HKFRS 8 regards as the chief operating decision maker, those segments might become the operating segments for the purposes of HKFRS 8; does not define segment revenue, segment expense, segment result, segment assets and segment liabilities; does not require segment information to be prepared in conformity with the accounting policies adopted for the entity s financial statements; entities will have more discretion in determining what is included in segment profit or loss under HKFRS 8, limited only by their internal reporting practices; 7

18 requires additional entity-wide disclosures even when an entity has only one reportable segment. These include information about each product and service or groups of products and services; requires analyses of revenues and certain non-current assets by geographical area with an expanded requirement to disclose revenues/assets by individual foreign country (if material), irrespective of the identification of operating segments; and requires to disclose information about transactions with major customers. If revenues from transactions with a single external customer amount to 10 per cent or more of the entity s revenues, the total amount of revenue from each such customer and the segment or segments in which those revenues are reported must be disclosed. Upon adoption of HKFRS 8, the identification of an entity s operating segments will be based on management approach. Generally the information to be reported would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segment. Such information may be different from what is used to prepare the income statement and balance sheet. 1.3 Amendment to HKAS 1 Presentation of Financial Statements - Capital Disclosures (effective for annual periods beginning on or after 1 January 2007) HKAS 1 was amended together with the release of HKFRS 7. The amendment adds requirements for disclosure of: the entity s objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. These disclosure requirements apply to all entities. Illustrative examples are provided within the amendment as guidance. HKAS 1 does not define capital and acknowledges that an entity s capital may not equate to equity as defined by HKFRSs. However, it requires disclosure by the entity of its level of capital and how it manages it. The amendment brings in additional disclosures which are specific to the entity and these will need to be considered and drafted. 1.4 HKAS 23 (Revised) Borrowing Costs (effective for annual periods beginning on or after 1 January 2009) eliminates the option available under the previous version of the Standard to recognise all borrowing costs immediately as an expense; to the extent that borrowing costs relate to the acquisition, construction or production of a qualifying asset, the revised Standard requires that they be capitalised as part of the cost of that asset; all other borrowing costs should be expensed as incurred; and generally to be applied prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after the effective date of the revised Standard. Therefore, if an entity has previously followed an accounting policy of immediately recognising all borrowing costs as an expense: it is not required to retrospectively restate its financial statements for borrowing costs incurred on qualifying assets before the effective date of the Standard; nor is it required to apply the capitalisation policy to borrowing costs incurred subsequent to the effective date on projects that had commenced (i.e. that had met HKAS 23 s criteria for commencement of capitalisation) before the effective date. This standard eliminates the option to recognise all borrowing costs immediately as an expense which will only impact entities which are currently applying such accounting policy. Reporting entities have the choice to either apply this standard prospectively or retrospectively from a specified designated date. 8

19 1.5 HKAS 1 (Revised) Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2009) textual changes including changes to the titles of individual financial statements (e.g. a balance sheet will in future be referred to as a statement of financial position ); majority of the changes made are not substantive; requires to include a statement of financial position as at the beginning of the earliest comparative period whenever an entity retrospectively applies an accounting policy, or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements; all items of income and expense (including those accounted for directly in equity) must in future be presented either: in a single statement (a statement of comprehensive income ); or in two statements (a separate income statement and statement of comprehensive income ) no longer permitted to present items of other comprehensive income (e.g. gains and losses on revaluation of property, plant and equipment) separately in the statement of changes in equity. Such non-owner movements must be presented in a statement of comprehensive income and the total carried to the statement of changes in equity; no longer permitted to present transactions with owners in their capacity as owners in the notes the statement of changes in equity must be presented as a separate financial statement; and new detailed requirements regarding the presentation of items of other comprehensive income. The main change relates to the presentation of non-owner changes separately from the statement of changes in equity. Other changes are mainly textual changes only. 1.6 HK (IFRIC) - Int 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies (effective for annual periods beginning on or after 1 March 2006) HKAS 29 Financial Reporting in Hyperinflationary Economies requires that the financial statements of an entity that reports in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. Comparative figures for prior period(s) should be restated into the same current measuring unit. HK (IFRIC) - Int 7 contains guidance on how an entity would restate its financial statements in the first year it identifies the existence of hyperinflation in the economy of its functional currency. The functional currencies of all significant subsidiaries should be assessed to determine whether they display the characteristics of a hyperinflationary economy. If the functional currency of a subsidiary is considered to be hyperinflationary, the process of restating the financial statements retrospectively is complex and time consuming and may require the subsidiary to access historical records evidencing the purchase of assets (which can prove difficult). 1.7 HK (IFRIC) - Int 8 Scope of HKFRS 2 (effective for annual periods beginning on or after 1 May 2006) HK (IFRIC) - Int 8 clarifies the following: HKFRS 2 Share-based Payment applies to share-based payment transactions in which the entity cannot identify specifically some or all of the goods or services received; in the absence of specifically identifiable goods or services, other circumstances may indicate that goods or services have been (or will be) received, in which case HKFRS 2 applies; if the identifiable consideration received (if any) appears to be less than the fair value of the equity instruments granted or the liability incurred, typically this circumstance indicates that other consideration (i.e. unidentifiable goods or services) has been (or will be) received; the entity should measure the identifiable goods or services received (or to be received) in accordance with HKFRS 2; 9

20 the entity should measure the unidentifiable goods or services received (or to be received) as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be received); the unidentifiable goods or services received (or to be received) should be measured at grant date; and for cash-settled transactions in which unidentifiable goods or services are received, the liability should be remeasured at each subsequent reporting date in order to be consistent with HKFRS 2. It is expected that this interpretation will result in more share-based payment arrangements being recognised at fair value. For example, reporting entities may provide shares to a charitable organisation for nil consideration as a means of enhancing its corporate image. Although the entity cannot identify any specific goods or services received and estimate the fair value of those goods or services, the entity is still required to recognise and measure the sharebased payment by reference to the fair value of the shares granted. 1.8 HK (IFRIC) - Int 9 Reassessment of Embedded Derivatives (effective for annual periods beginning on or after 1 June 2006) HK (IFRIC) - Int 9 addresses two questions: is an entity required to reconsider its assessment as to whether an embedded derivative needs to be separated after the initial recognition of the hybrid contract? should a first-time adopter of HKFRSs make its assessment as to whether an embedded derivative needs to be separated when the entity first became a party to the hybrid contract, or when the entity adopts HKFRSs for the first time? an entity generally should not reassess its conclusion as to whether an embedded derivative needs to be separated from the hybrid contract after it is initially recognised; a first-time adopter of HKFRSs should make its assessment on the basis of conditions existing when the entity became party to the hybrid contract, not when it adopts HKFRSs; and an entity should only revisit its assessment if the terms of the contract change and the expected future cash flows of the embedded derivative, the host contract, or both, have changed significantly relative to the previously expected cash flows on the contract. The interpretation clarifies that entities do not need to continuously reassess whether the embedded derivatives should be separately recognised, for example when an entity changes its functional currency, reassessment is not permitted for any outstanding contracts or firm commitments which were considered closely related prior to the change of the entity s functional currency unless the terms of the contracts or firm commitment are changed significantly. 1.9 HK (IFRIC) - Int 10 Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006) addresses the interaction between the requirements of HKAS 34 Interim Financial Reporting and the recognition of impairment losses on goodwill under HKAS 36 Impairment of Assets and certain financial assets under HKAS 39 Financial Instruments: Recognition and Measurement; and where an entity has recognised an impairment loss in an interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost, that impairment should not be reversed in subsequent interim financial statements nor in annual financial statements. The interpretation will enhance consistency in practice due to the conflict between HKAS 34 and HKAS 36/HKAS

21 1.10 HK (IFRIC) - Int 11 HKFRS 2 - Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007) when an entity receives services as consideration for rights to its own equity instruments, the transaction should be accounted for as equity-settled. This is regardless of whether: the entity chooses or is required to purchase equity instruments to satisfy its obligation; the entity or its shareholder(s) grants the right; or the transaction is settled by the entity or by its shareholder(s). where a parent grants rights to its equity instruments to employees of its subsidiary, assuming the transaction is accounted for as an equity-settled share-based payment transaction in the consolidated financial statements, the subsidiary should measure the services received using the requirements for equity-settled transactions in HKFRS 2, and should recognise a corresponding increase in equity as a contribution from the parent; where a subsidiary grants rights to equity instruments of its parent to its employees: the subsidiary has incurred a liability to transfer cash or other assets of the entity to its employees (being a liability to transfer equity instruments of its parent); and the subsidiary accounts for the transaction as a cash-settled share-based payment transaction. The interpretation clarifies the application of HKFRS 2 Share-based Payment to certain share-based payment arrangements involving the entity s own equity instruments and to arrangements involving equity instruments of the entity s parent. Although this interpretation focuses on transactions with employees, it also applies to similar sharebased payment transactions with suppliers of goods or services other than employees HK (IFRIC) - Int 12 Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008) addresses the accounting by private sector operators involved in the provision of public sector infrastructure assets and services, such as toll roads, tunnels, bridges, etc.; does not address the accounting for the government (grantor) side of such arrangements; for arrangements falling within its scope (essentially those where the infrastructure assets are not controlled by the operator), the infrastructure assets are not recognised as property, plant and equipment of the operator. Depending on the terms of the arrangement, the operator will recognise: a financial asset (where the operator has an unconditional right to receive a specified amount of cash or other financial asset over the life of the arrangement); or an intangible asset (where the operator s future cash flows are not fixed e.g. where they will vary according to usage of the infrastructure asset); or both a financial asset and an intangible asset where the operator s return is provided partially by a financial asset and partially by an intangible asset. This interpretation gives guidance on the accounting by operators for public-to-private service concession arrangements and sets out the general principles on recognising and measuring the obligations and related rights in service concession arrangements. Requirements for disclosing information about service concession arrangements are continued to be governed by HKAS - Int 29 Service Concession Arrangements: Disclosures HK (IFRIC) - Int 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008) addresses the accounting by entities that provide their customers with incentives to buy goods or services by providing awards (called award credits in the Interpretation) as part of a sales transaction. Common examples are airline and hotel loyalty schemes and credit card reward schemes; 11

22 applies to customer loyalty award credits that: entities grant to their customers as part of a sales transaction under HKAS 18 Revenue (a sale of goods, rendering of services or use by the customer of entity assets); and subject to meeting any further qualifying conditions, the customers can redeem for free or discounted goods or services in the future. requires the entity that grants the awards to account for the sales transaction that gives rise to the award credits as a multiple-element revenue transaction and allocate the fair value of the consideration received or receivable between the award credits granted and the other components of the revenue transaction; applies irrespective of whether the entity supplies the awards (the discounted goods or services) or whether a third party supplies them; and prohibits the alternative treatment of recognising the full consideration received as revenue, with a separate liability for the cost of supplying the awards. This interpretation addressed accounting by the entity that grants award credits to its customers, either by supplying goods or services itself and/or by granting rights to claim goods or services from a third party (for example, credit card reward points and airline mileage) HK (IFRIC) - Int 14 HKAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008) HK (IFRIC) - Int 14 addresses three issues: when refunds or reductions in future contributions should be regarded as available in the context of paragraph 58 of HKAS 19 Employee Benefits; how a minimum funding requirement might affect the availability of reductions in future contributions; and when a minimum funding requirement might give rise to a liability. economic benefit in the form of a refund or reduction in future contributions is available if the entity has an unconditional right to realise the benefit at some point during the life of the plan or when the plan is settled, even if the benefit is not realisable immediately at the balance sheet date; the economic benefit available in the form of refunds or reductions should be measured, in accordance with the terms of the plan and statutory requirements, at the maximum amount available; should a minimum funding requirement exist, HK (IFRIC) - Int 14 distinguishes between contributions that are required to cover: a) an existing shortfall for past service on the minimum funding basis; and b) the future accrual of benefits. Under, the minimum contribution requirement relates to services already received by an entity. To the extent that the contributions payable will not be available for a refund or reduction in future contributions, an entity recognises a liability when the obligation to provide such contributions arises. The liability recognised will either reduce the defined benefit asset or increase the defined benefit liability so that no gain or loss is expected to result from applying paragraph 58 of HKAS 19 when the contributions are paid. Under, an entity should determine the economic benefit available as a reduction in future contributions as the present value of the estimated future service cost in each year and the estimated minimum funding contributions required in respect of the future accrual of benefits in that year. This interpretation applies to all post-employment defined benefits and other long-term employee defined benefits. 12

23 2. HKFRS 7: Financial Instruments: Disclosures Introduction HKFRS 7 was issued by the HKICPA in September It supersedes both HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions and the disclosure requirements of HKAS 32 Financial Instruments: Disclosure and Presentation. In respect of those areas which are new disclosure requirements, in particular disclosure of quantitative information about exposure to each type of risk (see section below), we have added our own interpretative guidance which is highlighted by green shading, as well as provide case examples. There are substantial discussions in section on the requirement to provide sensitivity analysis of market risk as this new disclosure requirement is not easy to understand and apply, particularly for corporate entities which are not in the financial services industry. We have also devoted significant amount of discussions on fair value disclosures (see section below) and the requirements to provide qualitative disclosures concerning each type of risk (see section below) even though these disclosure requirements are already in the existing HKAS 32 to a certain extent, as these are areas where past practice show that more guidance is still needed for a proper understanding of the appropriate disclosure requirements. A comprehensive guidance on the application of all the disclosure requirements of HKFRS 7 can be found in Chapter 21 Financial Instruments: Disclosure of Deloitte s Financial Reporting in Hong Kong book published in January The 2 key objectives of HKFRS 7 are to require entities to provide disclosures in their financial instruments that enable users to evaluate: (i) the significance of financial instruments for the entity s financial position and performance; and (ii) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. The disclosure requirements of HKFRS 7 are designed to meet these 2 key objectives with the intention of providing users of financial statements with information that would influence their assessment of the financial position, financial performance and of the amount, timing and uncertainty of future cash flows for that entity. These disclosure requirements are set out in our HKFRS 7 Disclosure Checklist which we have included in section 2.5. The key features of these disclosure requirements are discussed in sections to in respect of those disclosures which are designed to meet objective (i) above, and in sections to in respect of those disclosures which are designed to meet objective (ii) above. The specific requirements of HKFRS 7 are set out in the following sections: Section 2.1 Scope of HKFRS 7 Section 2.2 Section 2.3 Section 2.4 Section 2.5 Classes of financial instruments Significance of financial instruments Nature and extent of risks arising from financial instruments HKFRS 7 Disclosure Checklist 2.1 Scope of HKFRS 7 HKFRS 7 is applicable, with limited exceptions, to all entities and to all risks arising from all financial instruments, whether recognised or unrecognised. Recognised financial instruments include financial assets and financial liabilities that are within the scope of HKAS 39 Financial Instruments: Recognition and Measurement. Unrecognised financial instruments include some financial instruments that, although outside the scope of HKAS 39, are within the scope of HKFRS 7, such as certain loan commitments. It should further be noted that HKFRS 7 applies to the financial statements of subsidiaries. There is no exemption even if full disclosures are provided in the consolidated financial statements in which the subsidiary is included. The extent to which an entity will provide financial instrument disclosures will depend on the entity s use of financial instruments and the associated risks. As many of the requirements of HKFRS 7 are based on information provided internally to key management personnel, the depth of disclosure will reflect partly the information provided for use within the business. Entities with few financial instruments and associated risks will provide less disclosure than those entities that have significant financial instruments and related exposures to financial risk. 13

24 2.2 Classes of financial instruments HKFRS 7 specifies a number of disclosure requirements to be provided by class of financial instrument These include derecognition of financial assets; allowance account for credit losses (if an entity chooses under HKAS 39 to have a separate allowance account); impairment losses in the period; fair value of all financial instruments; day 1 profit or loss ; and credit risk. For the purpose of such disclosures, HKFRS 7 requires the entity to group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. The classes are to be reconciled to the line items presented in the balance sheet. [HKFRS 7(6)] The classes are determined by the entity and are distinct from the categories of financial instruments specified by HKAS 39. In many instances, classes of financial instruments will be more narrow than the categories of financial instruments. For example, loans and receivables is a financial instrument category under HKAS 39 that could comprise a number of classes such as home loans, credit card loans, unsecured medium term loans etc. The preparer of the financial statements must strike a balance between providing excessive detail and obscuring information as a result of too much aggregation. [HKFRS 7(BC3)] 2.3 Significance of financial instruments One of the two key objectives of HKFRS 7 is to require entities to provide disclosures in its financial statements that enable users to evaluate the significance of financial instruments for the entity s financial position and performance. To achieve this, disclosures must be provided for the balance sheet, income statement and equity, as follows: Categories of financial assets and financial liabilities An entity is required to disclose the carrying amount for each financial instrument category as defined by HKAS 39 either on the face of the balance sheet or in the notes to the financial statements. [HKFRS 7(8)] As a recap, the 4 financial asset categories under HKAS 39 are held-to-maturity financial assets, loans and receivables, available-for-sale financial assets and financial assets carried at fair value through profit or loss. The financial liabilities categories under HKAS 39 are those financial liabilities carried at fair value through profit or loss and other financial liabilities Financial assets as at fair value through profit or loss HKFRS 7(9) requires extensive disclosure where an entity has designated loans and receivables as at fair value through profit or loss (FVTPL), since applying the fair value option to these instruments may result in a significant impact on the financial statements caused by fair value movements, and in particular those movements caused by changes in credit risk Financial liabilities as at FVTPL Where an entity has designated financial liabilities as at FVTPL, HKFRS 7(10) requires extensive disclosure and in particular disclosure about creditworthiness. These disclosures have been included to help alleviate concerns that users may misinterpret the profit or loss effects of changes in issuer s credit risk. The perceived anomaly of recording gains in profit or loss when the entity s credit rating deteriorates should be helped by disclosure of the changes in fair value attributable to the credit risk Reclassification Where an entity reclassifies financial assets in accordance with the requirements of HKAS 39, from cost or amortised cost to fair value or vice versa, disclosure of the amount that has been reclassified into and out of each category is required, together with the reason for that reclassification, [HKFRS 7(12)] Derecognition Some transfers of financial assets do not qualify for derecognition under the derecognition rules in HKAS 39. When such transfers take place, it is important for the users to be able to evaluate the significance of such transactions and the risks retained, the nature of the risks and rewards to which the entity continues to be exposed to and the extent of its continuing involvement with the asset. Hence disclosure is required of: [HKFRS 7(13)] the nature of the assets involved; the nature of the risks and rewards of ownership to which the entity remains exposed; (c) when the entity continues to recognise all of the assets, the carrying amounts of the assets and of the associated liabilities; and 14

25 (d) when the entity continues to recognise the assets to the extent of its continuing involvement, the total carrying amount of the original assets, the amount of the assets that the entity continues to recognise, and the carrying amount of the associated liabilities. For example, a sale of a portfolio of receivables with a limited guarantee may result in the entity continuing to recognise the receivables and retaining some exposure to the receivables, but to a lesser extent than prior to the transfer. The disclosures for derecognition are required by class of financial asset and can be provided either by type of financial assets (i.e. differentiating by characteristics of the assets) or by type of risks or rewards of ownership to which the entity remains exposed Collateral The entity is required to disclose the carrying amount of financial assets it has pledged as collateral for its liabilities and contingent liabilities. The entity is also required to disclose the terms and conditions relating to its pledge. Terms and conditions relating to the pledge that require disclosure may include: how much collateral needs to be maintained as security for the loans; and the type of collateral that needs to be provided as security for the loans. Where an entity holds collateral (both financial and non-financial assets) as security for financial assets loaned to another entity and that it is permitted to sell or repledge in the absence of default by the owner of the collateral, the entity is required to disclose: the fair value of the collateral held; the fair value of any such collateral that has been sold or repledged, and whether the entity has an obligation to return it; and the terms and conditions associated with its use of the collateral. [HKFRS 7(15)] The disclosure of the existence of such collateral is important since it provides information to the user of the financial statements of the amount of collateral used and available for use that may not be recognised on the balance sheet of the entity. Disclosure of collateral that the entity does not have the right to sell or pledge in the absence of default by the borrower is required in the credit risk disclosures note see below Allowance account for credit losses Where financial assets are impaired by credit losses, and the entity records the impairment in a separate allowance account rather than by directly reducing the carrying amount of an asset, the entity is required to disclose a reconciliation of changes in that account during the period. [HKFRS 7(16)] This disclosure is required by class of financial asset and is useful in assessing the adequacy of the allowance for impairment losses and enabling comparison between entities. HKFRS 7 does not, however, specify components of the reconciliation. As the impairment for financial assets are determined differently from one entity to another, preparers are given flexibility in determining the most appropriate format for their needs. The example below set out the commonly encountered reconciling line items: Opening balance of the allowance account Plus: additional impairment losses recognised Less: reversals of impairment losses Less: amounts written off during the year Plus/less: exchange gains and losses on foreign denominated items Less: unwind of discount Closing balance XX XX (XX) (XX) XX (XX) XX 15

26 Entities may wish to expand on certain of the above items, depending on its facts and circumstances. For instance: if the additional impairment losses recognised line item is very significant, it could be analysed between losses due to breach of contract, bankruptcy of the underlying debtor, adverse changes in payment status of borrowers and national or local economic conditions that correlate with defaults on the assets in the group and increases due to increases in effective interest rates (floating rate debt); if the reversals of impairment losses line item is very significant, it may similarly be analysed according to the underlying cause of the reversal; and if the amounts written off during the year line item is very significant, it may be analysed, for example, by type of exposure, type of client, geographical or industry segment Compound financial instruments with multiple embedded derivatives HKAS 32 prescribes how a compound financial instrument should be separated into its liability and equity components. For a compound financial instrument, the value of the debt or equity component may be affected by the other component. For instance, for convertible debt, the value of the debt component may depend in part on the relative attractiveness of early conversion. Hence, the aggregate fair value of the convertible bond could differ from the sum of the estimated fair values of the debt and equity components if these were valued independently of each other. HKAS 32 assigns the full value of these interdependencies to the liability component and treats equity as the residual. This is arbitrary and can be argued to misstate the amount of the liability and thereby misstate the true interest cost. The interdependencies become even more significant when a compound instrument contains multiple embedded features whose values are also interdependent, e.g. the value of an embedded purchased call option and a written equity conversion option feature in a callable convertible debt instrument depend in part on each other as the equity conversion option is extinguished if the issuer exercises its purchased call option to redeem early, and vice versa the value of the issuer purchased call option depends on the likelihood that the holder will exercise its right to convert early into shares. Because of the importance of these features, HKFRS 7(17) requires an issuer of a compound instrument that has multiple embedded derivatives whose values are interdependent to disclose the existence of those features Defaults and breaches For loans payable recognised as financial liabilities at the reporting date, disclosure is required of any defaults during the period of principal, interest, sinking fund, or redemption terms. In addition, the entity is required to disclose the carrying amount of any such loans that are in default at the reporting date and whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue. [HKFRS 7(18)] Loans payable are defined as financial liabilities, other than short-term trade payables on normal credit terms. [HKFRS 7(Appendix A] It is important to note that disclosure of defaults is required of loans even where those defaults were rectified by the balance sheet date. Such disclosures are designed to provide the users with the relevant information about the entity s creditworthiness and its prospects of obtaining future loans Items of income, expense, gains or losses The items of income, expense, gains or losses that are required to be disclosed, either on the face of the income statement or in the notes to the financial statements, include the following: Net gains or net losses for each financial instrument category as defined by HKAS 39. [HKFRS 7(20)] These disclosures are intended to assist users in understanding the extent to which accounting policies affect the performance of the entity and understanding the nature of such gains and losses. Total interest income and total interest expense, determined using the effective interest method, for financial assets or financial liabilities that are not classified as at FVTPL. [HKFRS 7(20)] The separate disclosure of these amounts is intended to allow users to understand the extent to which financial instruments contribute to the total interest income and interest expense for the period. Fee income and expense, other than those amounts that are included in determining the effective interest rate, that arise from financial assets or financial liabilities that are not at fair value through profit or loss. Such items may include fee income earned as services are provided and fees that are earned on execution of a significant act. This information indicates the level of such activities and helps users to estimate possible future income of the entity. [HKFRS 7(20)(c)] Interest income on impaired financial assets that is determined using the rate of interest used to discount the future cash flows for the purposes of measuring the impairment loss. [HKFRS 7(20)(d)] The amount of any impairment loss for each class of financial asset. [HKFRS 7(20)(e)] These amounts may be combined with the disclosures that are required for the allowance account mentioned above. 16

27 Accounting policies HKAS 1 requires disclosure of the measurement bases used in preparing the financial statements and the other accounting policies used that are relevant to an understanding of the financial statements. For financial instruments these would normally include: [HKFRS 7(B5)] for financial assets or financial liabilities designated as at fair value through profit or loss: (i) the nature of the financial assets or financial liabilities that have been designated as at fair value through profit or loss; (ii) the criteria for so designating financial assets or financial liabilities on initial recognition; and (iii) how the entity has satisfied the criteria in HKAS 39 for such designation. the criteria for designating financial assets as available for sale; (c) whether regular way purchases and sales of financial assets are accounted for at trade date or at settlement date; (d) when an allowance account is used to reduce the carrying amount of financial assets impaired by credit losses: (i) the criteria for determining when the carrying amount of impaired financial assets is reduced directly (or, in the case of a reversal of a write-down, increased directly) and when the allowance account is used; and (ii) the criteria for writing off amounts charged to the allowance account against the carrying amount of impaired financial assets; (e) how net gains or net losses on each category of financial instrument are determined, for example, whether the net gains or net losses on items at fair value through profit or loss include interest or dividend income; (f) the criteria the entity uses to determine that there is objective evidence that an impairment loss has occurred; (g) when the terms of financial assets that would otherwise be past due or impaired have been renegotiated, the accounting policy for financial assets that are the subject of renegotiated terms Hedge accounting Disclosures are required for entities that apply hedge accounting in accordance with the hedge accounting rules stipulated in HKAS 39. These hedge accounting disclosures are provided to allow the user to understand the nature of the entities hedging relationships and the effect that those hedging relationships had on the performance of the entity both during the current period and what is expected in future periods. For each type of hedge accounting that is applied (fair value hedge, cash flow hedge, or a hedge of net investment in a foreign operation), the entity should disclose the following: [HKFRS 7(22)] a description of each type of hedge; a description of the financial instruments designated as hedging instruments and their fair values at the reporting date; and (c) the nature of the risks being hedged. Additional disclosures are required for cash flow hedges as the entity has to make significant judgements about the expectation of future cash flows that are being hedged. Also, as cash flow hedging requires recognition of gains/losses directly in equity and frequent recycling from equity to profit or loss, the Standard requires these amounts to be transparent. These additional disclosures are set out in HKFRS 7(23). HKFRS 7 requires an entity to disclose the extent to which hedge accounting has been effective in the period. For cash flow hedges and hedges of a net investment in a foreign operation, the amount of ineffectiveness may be disclosed either on the face of the income statement (as all hedge effectiveness is recognised in profit or loss), or alternately in a note to the financial statements. 17

28 The disclosure requirements for fair value hedges are somewhat different, although the objective of disclosing hedge ineffectiveness is the same. In a fair value hedge, the gain or loss on the hedging instrument and the gain or loss on the hedged item are immediately recognised in profit or loss in all periods. The net of these amounts is equivalent to the hedge effectiveness that is recognised in profit or loss in the period. HKFRS 7, therefore, requires an entity to disclose separately the gains or losses on the hedging instrument and on the hedged item that are attributable to the hedged risk. [HKFRS 7(24)] This may be disclosed either on the face of the income statement or alternately in a note to the financial statements Fair value Fair value disclosures should be provided for each class of financial asset and financial liability, in a way that allows a comparison to be made to the corresponding carrying amounts in the balance sheet. [HKFRS 7(25)] Financial assets and financial liabilities should be grouped into appropriate classes, but shall only be offset to the extent that their carrying amounts are offset in the balance sheet. [HKFRS 7(26)] It should be noted that some financial instruments are already carried at fair value in the balance sheet and their fair values need not be disclosed in the notes. However, for the instruments accounted for on a different basis, e.g. cost or amortised cost, fair value disclosures are required. An exception to this is for those financial instruments whose carrying amount reasonably approximates fair value, as is the case for most short-term trade receivables and payables. Additional exceptions exist for investments in unquoted equity instruments and derivatives linked to unquoted equity instruments when their fair value cannot be measured reliably, and contracts that contain a discretionary participation feature if their fair value cannot be measured reliably. [HKFRS 7(29)] However, where fair value cannot be measured reliably, additional disclosures are required to assist users of the financial statements in making their own judgements about the extent of possible differences between the carrying amount of those financial assets or financial liabilities and their fair value. [HKFRS 7(30)] Disclosure is required of the methods and significant assumptions used in arriving at fair values. This includes disclosure of whether a market price or a valuation model has been used. Where a valuation technique has been used, disclosures are required as to whether any inputs into the valuation model are based on assumptions that are not supported by observable prices from observable current market transactions in the same instrument and not based on available observable market data. Where such fair values are recognised in the financial statements, if changing one or more assumptions would change fair value significantly, disclosure of this fact and the effect of those changes should be provided. [HKFRS 7(27)] Only those changes in assumptions that could result in a significantly different estimate of fair value are required, and such disclosures are not required to reflect interdependencies between those assumptions. [HKFRS 7(BC38)] Further disclosure shall also be provided of the total amount of change in fair value that has been estimated using such a valuation technique that was recognised in profit or loss for the period. [HKFRS 7(27)] Disclosure of the method and significant assumptions used is very important as the use of valuation models inevitably involves a significant degree of judgement. Users of the financial statements should be in a position to understand the subjective and judgemental nature of the fair value numbers and to judge for themselves whether the assumptions made by management are reasonable. 18

29 Example A Company B At Dec 31, 2007 At Dec 31, 2006 Carrying amount Fair value Carrying amount Fair value HK$m HK$m HK$m HK$m Loans and receivables 3,428 3,543 5,200 5,602 Held-to-maturity investments 6,870 7,243 9,304 9,730 The assumptions used to estimate current fair values of investments are summarised below. (i) For short-term loans and receivables (e.g. trade receivables) the carrying amount approximates to fair value because of their short maturities. (ii) For long-term loans and receivables which are non-quoted corporate debt issued by non-quoted companies, fair value has been calculated by discounting the future cash flows at the estimated market rate of interest for a similar issuer with the same credit quality. (iii) The fair values of held-to-maturity quoted corporate debt are derived from their external quoted prices. At Dec 31, 2007 At Dec 31, 2006 Fair value of financial liabilities Carrying amount Fair value Carrying amount Fair value HK$m HK$m HK$m HK$m Short-term creditors and borrowings Current portion of long-term debt Bank loans Listed HK$ bonds US$ bond Total current portion of long-term debt Non-current portion of long-term debt Listed HK$ bonds US$ bond Bank loans Total long-term debt 1,685 1,829 1,032 1,101 The assumptions used to estimate current fair values of debt and other financial instruments are summarised below: (i) For short-term creditors and short-term borrowings (e.g. commercial paper and short-term borrowings under committed facilities) the carrying amount approximates to fair value because of their short maturities. (ii) The fair values of the US$ bond 2011 and bank loans have been calculated by discounting their future cash flows at the market rate that reflects current interest rates and current spreads for the entity. (iii) The fair values of the HK$ bonds have been derived from their external quoted prices. 19

30 2.4 Nature and extent of risks arising from financial instruments HKFRS 7 has two key objectives: firstly to show the significance of financial instruments as discussed in section 2.3 above; and, secondly, to require entities to disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date as discussed below. Both qualitative and quantitative disclosures are required about the risks that arise from financial instruments and how these risks have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk. [HKFRS 7(32)] The disclosures shall either be provided in the financial statements or incorporated by clear cross-reference from the financial statements to some other statement, such as a management commentary or risk report. [HKFRS 7(B6)] Qualitative disclosures For each type of risk that an entity is exposed to, disclosure is required of the exposures to that risk, explanation of how it arose, the entity s objective, policies and processes for managing the risk and the method used to measure it. Any changes from the previous period are also required to be disclosed. [HKFRS 7(33)] Disclosure of the entity s policies and processes for accepting, measuring, monitoring and controlling risk may include disclosure of the following: [HKFRS 7(IG15)(b,c)] the structure and organisation of the entity s risk management function; the scope and nature of risk reporting or measurement systems; policies for hedging or mitigating risk, including policies and procedures for taking collateral; the entity s processes for monitoring the continuing effectiveness of such hedges or mitigating devices; and disclosure of the policies and procedures that are undertaken to avoid excessive concentrations to risk. An entity is required to disclose any changes in the qualitative information from the previous period. Such changes may result from changes in the risk exposure or from changes in the way in which the exposures are managed. [HKFRS 7(IG17)] One of the objectives of the disclosure requirements is to enable users to evaluate an entity s ability to generate returns, and to appreciate the risks and uncertainties of those expected returns. This evaluation can only be meaningful if it is carried out in the context of the entity s risk management policies. The 2 examples below illustrate typical disclosures for a corporate entity which is not in the financial services industry (Example 2.4.1A) and a bank (Example 2.4.1B) which comply with the qualitative disclosure requirements of HKFRS 7(33). It can be seen from these examples that the extent of the qualitative disclosures is much greater for an entity which is a bank, which is reflective of the situation that normally a banking entity has far greater exposure to risks arising from its financial instruments than a corporate entity that is not in the financial services industry. 20

31 Example 2.4.1A The Group s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The board of directors determines the treasury policy of the group and delegates the authority for execution of the policy to treasury professionals within the group treasury department. Any changes to treasury policy are authorised by the board of directors. The board reviews regularly the execution of the policy through internal management reporting and regular meetings with the head of group treasury. Group treasury uses internal valuation techniques, validated with external valuations when valuing derivatives for internal and external reporting purposes. Derivatives are not entered into for speculative purposes. Foreign currency risk Foreign currency risk is twofold: (i) sales denominated in a currency different to the functional currency of the entity; and (ii) the foreign currency risk of the net assets of foreign operations. The group has a policy of hedging eighty-percent of expected future foreign currency sales with foreign currency forward contracts. The group enters into a series of forward contracts at the start of the first and second half-years to hedge foreign currency risk for the next three years. Treasury monitors the level of hedges and may execute additional hedges if future expectations of sales are higher than originally budgeted. The group has a policy of applying hedge accounting where the forwards can be designated in a qualifying cash flow hedge relationship. The group endeavours to borrow in a currency that is equal to the group s proportionate interest in foreign operations. The group has exposure to its PRC and Singapore foreign operations. Where the entity has foreign currency denominated borrowings that match the exposure to the foreign operations it will designate in a qualifying hedge relationship the debt as hedging that foreign operation. In some instances the group will borrow in a currency different to the net assets of a foreign operation as the group may consider a particular currency to be better value at the time when the borrowing is entered into. In this instance the group will enter into cross-currency swaps to swap the borrowing into the currency that matches the foreign operation and will jointly designate that swap and the debt as a hedge of a foreign operation. Interest rate risk The group has a policy of maintaining approximately ninety per cent of its borrowing costs on medium and long-term borrowings at fixed rates. The group considers the benefit of certainty of fixed borrowing costs to be in excess of the potential savings of being exposed to floating interest rates. The group generally borrows long-term in fixed rates but may occasionally borrow at floating rates and swap into fixed. The group has a policy of applying cash flow hedge accounting in this instance. The group is exposed in the short-term to floating rates in respect of any overnight and other short-term facilities. Credit risk The group does not actively hedge counterparty credit risk as its trade receivables are with highly rated counterparties. The group is not exposed to concentration risk as the group sells broadly across industry sectors and is not exposed significantly to any one customer. Treasury is responsible for monitoring counterparty credit risk and will seek authority from the board should it take a view that credit risk needs to be hedged. Liquidity risk The group has committed and uncommitted facilities with several financial institutions in order to meet short-term liquidity needs. Treasury has a policy of pooling group cash flows in order to maximise the return on surplus cash and also utilise cash within the group for internal lending in order to reduce the costs of external short-term funding. Treasury monitors the level of short-term funding and balances the need for access to short term funding with the long-term funding needs of the group. 21

32 Example 2.4.1B All the Bank s activities involve analysis, evaluation, acceptance and management of risk or combination of risks. The most significant types of financial risk are credit risk (which includes country and cross-border risk), liquidity risk and market risk. Market risk includes foreign exchange, interest rate and equity price risks. The Bank s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor continuously the risks and limits by means of reliable and up-to-date administrative and information systems. The Bank continuously modifies and enhances its risk management policies and systems to reflect changes in markets and products and in best practice risk management processes. Training, individual responsibility and accountability, together with a disciplined, conservative and constructive culture of control, lie at the heart of the Bank s management of risk. The Group Risk Management Board, under authority delegated to it by the Board of Directors, formulates high level Group risk management policy, monitors risk and receives reports which allow it to review the effectiveness of Bank s risk management policies. Credit risk management Credit risk is the risk that financial loss arises from the failure of a customer or counterparty to meet its obligations under a contract. It arises principally from lending, trade finance, treasury and leasing activities. The Bank has dedicated standards, policies and procedures to control and monitor all such risks. Liquidity and funding management The Bank maintains a diversified and stable funding base of core retail and corporate customer deposits as well as portfolios of highly liquid assets. The objective of the Bank s liquidity and funding management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due. The management of liquidity and funding is primarily carried out locally in the operating companies of the Bank in accordance with practice and limits set by the Group Risk Management Board. These limits vary by local financial unit to take account of the depth and liquidity of the market in which the entity operates. It is the Bank s general policy that each banking entity should be self-sufficient with regard to funding its own operations. Exceptions are permitted to facilitate the efficient funding of certain short-term treasury requirements and start-up operations or branches which do not have access to local deposit markets, all of which are funded under strict internal and regulatory guidelines and limits from the Bank s largest banking operations. These internal and regulatory limits and guidelines serve to place formal limitations on the transfer of resources between Bank entities and are necessary to reflect the broad range of currencies, markets and time zones within which the Bank operates. The Bank requires operating entities to maintain a strong liquidity position and to manage the liquidity profile of their assets, liabilities and commitments so that cash flows are appropriately balanced and all funding obligations are met when due. Market risk management The objective of the Bank s market risk management is to manage and control market risk exposures in order to optimise return on risk while maintaining a market profile consistent with the Bank s status as a premier provider of financial products and services. Market risk is the risk that movements in market rates, including foreign exchange rates, interest rates, credit spreads and equity and commodity prices will reduce the Bank s income or the value of its portfolios. The Bank separates exposures to market risk into either trading or non-trading portfolios. Trading portfolios include those positions arising from market-making and proprietary position-taking. Non-trading portfolios primarily arise from the management of the commercial banking assets and liabilities. The management of market risk is undertaken using risk limits approved by the Group Risk Management Board. Use of derivatives Commercially the Bank transacts in derivatives for three primary purposes to create risk management solutions for clients, for proprietary trading purposes, and to manage and hedge the Bank s own risks. Derivative instruments are classified as either trading or non-trading. 22

33 Trading derivatives Most of the Bank s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time, to benefit from expected changes in currency rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities: market-making involves quoting bid and offer prices to other market participants with the intention of generating revenues based on spread and volume; positioning means managing market risk positions with the expectation of profiting from favourable movements in prices, rates or indices; arbitrage activities involve identifying and profiting from price differentials between markets and products. Non-trading derivatives The Bank uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables the Bank to optimise the all-in cost to the Group of accessing debt capital markets and to mitigate market risk which would otherwise arise from structural imbalances between the profile of its assets and liabilities. The main non-trading derivatives are interest rate and cross-currency swaps, and credit default swaps, which are used to hedge the Bank s exposures to interest rates, credit spread movements and exchange rates inherent in non-trading assets, liabilities and positions, including fixed rate lending and medium term note issues, capital issues and fixed rate asset purchases. The following table illustrates activities undertaken by Bank, the related risks associated with such activities and the types of derivatives used in managing such risks. Activity Risk Type of hedge Management of the return on variable rate assets financed by shareholders funds and net noninterest bearing liabilities. Fixed rate lending and investments. Equity-linked retail funding. Management of other net interest income on retail activities. Investment in foreign currency assets Lending and investments. Firm commitments (e.g. asset purchases, issues arranged). Reduced profitability due to falls in interest rates. Sensitivity to increases in interest rates. Sensitivity to increases in equity market indices. Sensitivity of returns to changes in interest rates. Sensitivity to strengthening of HK$ against other currencies. Sensitivity to weakening credit quality. Sensitivity to changes in rates between arranging a transaction and completion. Receive fixed interest rate swaps. Pay fixed interest rate swaps. Receive equity swaps. Interest rate swaps and caps/floors according to the type of risk identified. Cross-currency and foreign exchange swaps. Foreign currency funding. Purchase credit default and total return swaps. Hedges are arranged at the time of commitments if there is exposure to rate movements. 23

34 2.4.2 Quantitative disclosures For each type of risk that an entity is exposed to HKFRS 7 requires an entity to provide quantitative information about exposure to that risk at the reporting date, based on information reported internally to key management personnel. [HKFRS 7(34)] In addition to the above disclosures which are based on information provided to key management personnel, HKFRS 7 requires, to the extent that these are not covered by the above disclosures, disclosures of credit, liquidity and market risk. [HKFRS 7(34)]. Furthermore, disclosure of concentrations of risk shall be provided if not apparent from those disclosures. [HKFRS 7(34)(c)] Concentrations of risk arise from financial instruments that have similar characteristics and are affected similarly by changes in economic or other conditions. The identification of concentrations of risk requires judgement and must take into account the specific circumstances of the entity. Disclosures may include: [HKFRS 7(B8)] description of how concentrations are determined; description of the shared characteristic that identifies each concentration, e.g.: counterparty credit rating, geographical distribution, industry sector and other risks such as liquidity and market risks; and the amount of the risk exposure associated with all financial instruments that share that risk characteristic. The quantitative information shall, in all instances, be provided for the risk exposures that exist at the reporting date. Where such information is unrepresentative of the exposure to financial risk during the period, an entity should provide additional information, which may include, but not be limited to, disclosure of the highest, lowest and average amount of risk the entity was exposed to during the period. [HKFRS 7(IG20)] Credit risk Credit risk is defined as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. [HKFRS 7(Appendix A)] HKFRS 7 disclosures about credit risk are substantial and are discussed in detail below. These disclosures are intended to provide the user with a sufficient understanding of the net risk position of financial assets at all stages and the extent of financial assets that are more likely to become impaired in the future Disclosure of the maximum exposure to credit risk For each class of financial asset, disclosure is required of the amount that best represents its maximum credit risk exposure at the balance sheet date, excluding any collateral and other amounts that do not qualify for offset in accordance with HKAS 32. [HKFRS 7(36)] For financial assets exposed to credit risk, the maximum exposure to credit risk is typically the gross carrying amount, net of any amounts offset in accordance with HKAS 32 and any impairment losses that are recognised in accordance with HKAS 39. [HKFRS 7(B9)] The following table provides further guidance on determining maximum exposure to credit risk. Maximum exposure to credit risk at the reporting date Derivatives that are measured at fair value Carrying amount of the derivatives. [HKFRS 7(B10)] Financial guarantees that have been granted Loan commitment that is irrevocable over the life of the facility, or is revocable only in response to a material adverse change Loan commitments that will be settled net in cash or other financial instruments The maximum amount the entity would have to pay if the guarantee is called on. This amount will generally be significantly greater than the amount recognised as a liability. [HKFRS 7(B10)(c)] The full amount of the commitment if the loan commitment cannot be settled net in cash or another financial asset. [HKFRS 7(B10)(d)] Carrying value as these are treated as a derivative. 24

35 HKFRS 7(B10)(c) states that the maximum exposure to credit risk for a written guarantee is the amount the entity could have to pay if the guarantee is called upon. It is reasonable to conclude that this amount should be based on the amount that could be required to be paid if the guarantee was called upon in its entirety, as opposed to the amount that could be claimed under the guarantee at the reporting date based on the then level of lending that the lender has made to the borrower. This approach equally applies to loan commitments Disclosure of collateral held as security and other credit enhancements HKFRS 7 requires disclosure of the collateral held and other credit enhancements. [HKFRS 7(36)] This requirement may be met by disclosing: [HKFRS 7(IG23)] the policies and processes for valuing and managing collateral and other credit enhancements obtained; a description of the main types of collateral and other credit enhancements (examples of the latter being guarantees, credit derivatives, and netting agreements that do not qualify for offset in accordance with HKAS 32); the main types of counterparties to collateral and other credit enhancements and their creditworthiness; and information about risk concentrations within the collateral or other credit enhancements Disclosure of information of the credit quality of financial assets that are neither past due nor impaired Disclosures shall be provided of the credit quality of financial assets that are neither past due nor impaired. [HKFRS 7(36)(c)] A financial asset is not past due where the debtor has not missed a contractual payment (interest or capital) when contractually due, and a financial asset is not impaired where there is no objective evidence of impairment. In providing these disclosures, the following information may be provided: [HKFRS 7(IG22)] an analysis of credit exposures using an external or internal credit grading system; the nature of the counterparty; (c) historical information about counterparty default rates; and (d) any other information used to assess credit quality Disclosure of information of financial assets that would otherwise be past due or impaired whose terms have been renegotiated Disclosure shall be provided of the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated. [HKFRS 7(36)(d)] An example where financial assets that would otherwise be past due whose terms have been renegotiated would be where the dates for repayment of a loan have been changed, e.g. previously a debtor was required to service a loan monthly but the loan has been renegotiated to require payments on a yearly basis. Were it not for the renegotiation of the terms, the loan would be past due as soon as a monthly repayment was missed Disclosure of financial assets that are either past due or impaired Disclosure of financial information shall be provided by class of financial asset for financial assets that are either past due or impaired. [HKFRS 7(37)] A financial asset is past due when the counterparty has failed to make a payment when contractually due. Past due status can trigger various actions such as renegotiation, enforcement of covenants, or even legal proceedings. The new terms and conditions of debt that has been renegotiated apply in determining whether the financial asset is past due for the purposes of this disclosure item. [HKFRS 7(IG27)] This disclosure shall include analysis of the age of financial assets that are past due but not impaired at the balance sheet date. [HKFRS 7(37)] An entity shall use its judgement to determine an appropriate number of time bands. [HKFRS 7(IG28)] 25

36 This disclosure of past due items may be particularly onerous for entities with accounts receivable. For example, if an entity has debtor repayment terms of 30 days from invoice date, yet it is customary for payment to only be received after 60 days, then those receivables that remain outstanding at the balance sheet date that are older than 30 days shall be disclosed as past due. This disclosure requirement is more onerous than that for breaches of loans payable, where short-term trade payables on normal credit terms are specifically excluded. The disclosure shall include an analysis of financial assets that are individually determined to be impaired at the reporting date and the factors that were considered in determining that those assets were impaired. [HKFRS 7(37)] Such an analysis may include the carrying amount, before deducting any impairment losses, the amount of any related impairment losses, and the nature and fair value of collateral available and other credit enhancements obtained. [HKFRS 7(IG29)] An analysis of impaired financial assets other than by age is useful because it helps users to understand why the impairment occurred. [HKFRS 7(BC55)] The disclosure shall also include disclosure of a description of collateral held by the entity as security and other credit enhancements and, unless impracticable, an estimate of their fair value. [HKFRS 7(37)(c)] Disclosure of the fair value of collateral for such debts provides useful information on the net risk position of those receivables Disclosure of collateral and other credit enhancements obtained Where an entity obtains financial or non-financial assets by taking possession of collateral or other credit enhancements held as security, for example, at foreclosure, and such collateral or credit enhancements are required to be recognised in accordance with HKAS 39, disclosure shall be provided of the nature and carrying amount of assets obtained. When those assets are not readily convertible into cash, then the entity s policies for disposing of those assets or using them in its operations shall also be disclosed. [HKFRS 7(38)] Liquidity risk Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. [HKFRS 7(Appendix A)] Liquidity risk arises because of the possibility (which may often be remote) that the entity could be required to pay its liabilities earlier than expected. Disclosure of a maturity analysis for all financial liabilities at the balance sheet date that shows the remaining contractual maturities for all financial liabilities at the balance sheet date together with a description of how it manages that liquidity risk is required. [HKFRS 7(39)] The analysis has to done by reference to the earliest contractual maturity date since this disclosure represents the worst case scenario. [HKFRS 7(BC57)] An entity shall exercise its judgement in determining the appropriate number of the time bands in that analysis. Since quantitative information is required to be reported based on information reported to key management personnel, the time bands should, where applicable, be equivalent to those reported internally. Some entities may have many more time bands than others, such as banks that disclose liquidity for 1 day, 1-3 days, 3-7 days, 7-30 days etc. In any event, one should evaluate whether the liquidity analysis provides sufficient disclosure of the liquidity requirements of an entity by considering the relative timing of its liquidity needs. For example, an entity may have significant liquidity requirements in a month s time, in which case aggregating all the liquidity requirements of the first year into one band may not be appropriate. When a counterparty has a choice of when an amount is required to be paid, the liability is included on the basis of the earliest date on which the entity can be required to pay, e.g. demand deposits shall be included in the earliest time band as the deposit holder can require repayment on demand. [HKFRS 7(B12)] When an entity is committed to make amounts available in instalments each instalment is allocated to the earliest period in which the entity can be required to pay, e.g. an undrawn loan commitment shall be included in the time band containing the earliest date that it can be drawn down. [HKFRS 7(B13)] While the loan commitment is undrawn it is generally an unrecognised financial liability. However, the requirement for a lender to include in the maturity analysis of liquidity risk its obligation to pay cash under undrawn loan commitments is reasonable as it demonstrates the amount of cash it is committed to pay to a borrower. Where the amount payable is not fixed, as is the case for issued debt that has a variable interest rate, the amount to be disclosed shall be determined by reference to the conditions existing at the reporting date. If amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the reporting date [HKFRS 7(B16)] The amounts to be provided in the liquidity analysis are contractual, undiscounted cash flows. These amounts will differ from the amounts disclosed in the balance sheet for financial liabilities since these are typically discounted amounts. 26

37 Examples of amounts included on an undiscounted basis include: [HKFRS 7(B14)] gross finance lease obligations, before deduction of finance charges; forward prices specified in forward agreements to purchase financial assets for cash; net amounts for pay (receive) floating/ receive (pay) fixed interest rate swaps for which net cash flows are exchanged (where the variable cash flow leg of the derivative is determined by reference to the interest rate yield curve at the reporting date); contractual amounts to be exchanged in a derivative financial instrument, such as a cross currency swap, for which gross cash flows are exchanged (where the variable cash flow leg of the derivative is determined by reference to the interest rate yield curve at the reporting date); and gross cash flows in respect to loan commitments. An entity may choose to disclose an expected maturity analysis of both its financial assets and financial liabilities where it manages its liquidity risk on that basis. When using expected maturities, it is recommended that disclosure be provided of how expected maturities are determined, how the estimates have been determined and why this differs from its contractual maturity analysis. [HKFRS 7(IG30)] Market risk Market risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk. [HKFRS 7(Appendix A)] Each of these risks is defined as follows: [HKFRS 7(Appendix A)] Currency risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk arises on financial instruments that are denominated in a different currency to the entity s functional currency. A sensitivity analysis shall be disclosed for each currency to which an entity has a significant exposure. Interest rate risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk arises on interest-bearing financial instruments that are recognised in the balance sheet, e.g. loans and receivables and on some financial instruments that are not recognised on balance sheet, like some loan commitments. (c) Other price risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market Examples of other price risks include equity price risk, commodity price risk, prepayment risk and residual value risk. Market risk sensitivity analysis is required for each type of market risk to which the entity is exposed at the reporting date showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at the reporting date. In addition, disclosure should be provided of the methods and assumptions that were used in preparing the sensitivity analysis, any changes from the previous period in the methods and assumptions used, and the reasons for those changes. [HKFRS 7(40)] Any recognised financial instrument at the reporting period whose cash flows are contractually linked to a variable or whose fair value is dependent on a variable should be included in a sensitivity analysis. For example, if an entity has issued debt that is contractually linked to inflation where the inflation linkage is considered a closely related embedded derivative, the carrying value of the debt and its impact in profit or loss will depend on the level of inflation throughout the reporting period and at the period end. Alternatively, if the inflation linkage was not closely related it would impact profit or loss through its re-measurement as a derivative at fair value through profit or loss. The sensitivity analysis provides useful information since it is relatively easy to calculate and understand, is suitable for all entities and highlights the nature and extent of risks that arise from financial instruments. [HKFRS 7(BC59)] It is not necessary to prepare an analysis that reflects inter-dependencies between risk variables, e.g. in preparing an interest rate sensitivity analysis an entity does not need to determine the impact of changes in interest rates would have on the relative strengthening and weakening of the currency with other currencies. Rather a simple sensitivity analysis that shows the change in only one variable is sufficient. [HKFRS 7(BC60)] 27

38 The preparation of a market risk sensitivity analysis requires the following steps: (i) Identify risk exposures All market risks to which the entity is exposed need to be identified. (ii) Identify the exposures at the balance sheet date and how those exposures affect the sensitivity analysis All financial instruments at the reporting date whose fair value and/ or cash flows are affected by changes in risk factors need to be identified. Examples of financial instruments and their impact in profit or loss are included below. Floating rate debt instruments, whether an asset or liability, have a sensitivity to interest rates. The entity will flex interest rates for floating rate instruments that are outstanding at the period end showing how profit or loss would have varied in the period assuming the instruments at the period end were outstanding for the entire period. Foreign currency denominated debt instruments are sensitive to foreign currency rates as monetary items are retranslated into the functional currency of the entity at the period end. The sensitivity to foreign currency rates applies irrespective of whether the instrument is an asset or a liability, whether it is measured at fair value or amortised cost. This includes intercompany foreign currency denominated loans that are expected to be repaid in the foreseeable future where the foreign currency risk does not eliminate on consolidation. Any financial instrument at the period end that is designated as at fair value through profit or loss or is held for trading. The sensitivity will depend on the underlying risks of the instrument. A debt instrument may be sensitive to changes in credit risk, interest rate, foreign currency risk, whereas an equity instrument may be sensitive to changes in equity prices and foreign currency risk. All derivatives in designated and qualifying fair value hedge accounting relationships. Fixed rate debt instruments that are hedged items in qualifying fair value hedges of interest rate risk are sensitive to changes in interest rates. Examples of financial instruments and their impact in equity are included below: foreign currency denominated debt instruments that are designated as a qualifying hedging instrument in a foreign currency cash flow or net investment hedge are sensitive to foreign currency rates; intragroup foreign currency denominated debt instruments to or from a foreign operation that are not expected to be repaid in the foreseeable future in accordance with HKAS 21(15) are sensitive to foreign currency rates where the foreign currency risk does not eliminate on consolidation; derivatives and embedded derivatives designated as effective hedging instruments in a cash flow hedge or a hedge of a net investment in a foreign operation; foreign currency denominated equity securities classified as available for sale are sensitive to foreign currency rates and equity prices; debt securities classified as available for sale are sensitive to interest rate risk and credit risk, and may also be sensitive to foreign currency risk. An example of a financial instrument that has no impact on profit or loss or equity is a fixed rate debt instrument denominated in the entity s functional currency, whether an asset or liability, provided that it is measured at amortised cost. The sensitivity of profit or loss and the sensitivity of equity shall be disclosed separately. [HKFRS 7(B27)] (iii) Determine what a reasonably possible change is in the relevant risk variable that were reasonably possible at that date Each entity needs to determine what it considers to be a reasonably possible change in the relevant risk variable and should consider both the economic environment in which it operates and the time frame over which it is making the assessment. A reasonably possible change in a relevant risk variable in one environment may not be the same in another environment, e.g. a reasonably possible change in interest rates may be 100bp for HK$ denominated debt, but the same could not be said for RMB denominated debt where a reasonably possible change may be substantially smaller. Entities are therefore required to judge what those reasonably possible changes are and should not include remote or worse case scenarios or stress tests. A reasonably possible change in the relevant risk variable should be assessed over a time frame until the entity next presents these disclosures, which is usually its next annual reporting date. [HKFRS 7(B19)] 28

39 While the range of reasonably possible changes may be wide, disclosure is not required for each change within that range. It is sufficient to disclose the effects of the changes at the limits of the reasonably possible range. [HKFRS 7(B18)] (iv) Determine the appropriate level of aggregation that should be provided in the disclosures In providing these disclosures, one needs to decide how to aggregate the information to display the overall picture without combining information with different characteristics about exposures to risks from significantly different economic environments. Disclosure may for instance, be provided separately for financial instruments that are held for trading from those that are not. Alternatively disclosures may be disclosed for each risk. As a minimum disclosure of sensitivity analyses for each currency to which an entity has a significant exposure shall be provided. [HKFRS 7(B24)] An entity shall provide sensitivity analyses for the whole of its business but may provide different types of sensitivity analyses for different classes of financial instruments. [HKFRS 7(B21)] (v) Calculate and present the sensitivity analyses Entities shall disclose the effect on profit or loss and equity for exposures at the balance sheet date assuming that a reasonably possible change in the relevant risk variable had been applied to those exposures at the reporting date. [HKFRS 7(B18)] The sensitivity may be reported separately for different lines in the income statement or for consolidated profit or loss and equity. An entity might disclose a sensitivity analysis for interest rate risk for each currency in which the entity has material exposures to interest rate risk. [HKFRS 7(IG34)] The sensitivity analysis is prepared based on financial instruments that are recognised at the reporting date. This is the case even where those exposures did not exist for the entire period or where the exposure changed materially during the period. For example, an entity is building a road. To finance the construction of the road, it negotiates a floating rate debt facility. The entity starts to draw down on the facility half way through the year and at year end it has fully drawn down on the facility. A sensitivity analysis will be prepared for the loan showing profit or loss sensitivity assuming that the loan was in place for the entire period. A similar situation would arise in the case of an amortising loan where the exposure has reduced over the period due to part repayments of principal. In that instance, the sensitivity analysis would be prepared on the exposure at the reporting date although it had significantly higher exposures during the period. HKFRS 7(35) does state that if the quantitative data disclosed as at the reporting date are unrepresentative of an entity s exposure to risk during the period, an entity shall provide further information that is representative. With respect to sensitivity analysis, an entity may provide supplementary disclosure illustrating the impact on profit or loss and equity based on the timing of recognition and derecognition of financial instruments in the period as opposed to basing the analysis solely on the financial instruments recognised at the period end. HKFRS 7 requires disclosure of a sensitivity analysis showing how profit or loss and equity would have been affected by changes in the relevant risk variable. The Standard is not clear whether sensitivity analysis should be provided on a pre or post tax basis. As equity is defined in HKAS 32 as the residual interest in the assets of the entity after deducting all of its liabilities and tax on gains or losses recognised in equity will also be recognised in equity, it is reasonable to assume that for the purposes of the sensitivity analysis the analysis should be net of tax. Additionally, HKFRS 7(IG36) provides an example of a sensitivity analysis which is determined on an after-tax basis. 29

40 Example A Foreign currency sensitivity analysis The Group is mainly exposed to RMB and the Japanese Yen. The following table details the Group s sensitivity to a 10% increase and decrease in the HK$ against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in profit and other equity where the HK$ strengthens 10% against the relevant currency. For a 10% weakening of the HK$ against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative. RMB Impact Yen Impact HK$ 000 HK$ 000 HK$ 000 HK$ 000 Profit or loss 834 1,792 (i) (iii) Other equity 962 1,232 (ii) (iv) (i) This is mainly attributable to the exposure outstanding on RMB receivables and payables at year end in the Group. (ii) This is as a result of the changes in fair value of derivative instruments designated as cash flow hedges and net investment hedges. (iii) This is mainly attributable to the exposure to outstanding Yen payables at the year end. (iv) This is principally as a result of the changes in fair value of derivative instruments designated as cash flow hedges. The Group s sensitivity to foreign currency has decreased during the current period mainly due to the disposal of RMB investments and the reduction in RMB sales in the last quarter of the financial year which has resulted in lower RMB denominated trade receivables. In management s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure does not reflect the exposure during the year. RMB denominated sales are seasonal with lower sales volumes in the last quarter of the financial year, which results in a reduction in RMB receivables at year end. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management s assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group s: profit for the year ended 31 December 2007 would decrease/increase by HK$43,000 (2006: decrease/increase by HK$93,000). This is mainly attributable to the Group s exposure to interest rates on its variable rate borrowings; and other equity reserves would decrease/increase by HK$19,000 (2006: decrease/increase by HK$12,000) mainly as a result of the changes in the fair value of available-for-sale fixed rate instruments. 30

41 The Group s sensitivity to interest rates has decreased during the current period mainly due to the reduction in variable rate debt instruments and the increase in interest rate swaps. Equity price sensitivity analysis The sensitivity analyses below have been determined based on the exposure to equity price risks at the reporting date. If equity prices had been 5% higher/lower: net profit for the year ended 31 December 2007 would have been unaffected as the equity investments are classified as available-for-sale and no investments were disposed of or impaired; and other equity reserves would increase/decrease by HK$297,000 (2006: increase/decrease by HK$286,000) for the Group as a result of the changes in fair value of available-for-sale shares. The Group s sensitivity to equity prices has not changed significantly from the prior year. ABC receives HK$200 to enter into a contract that requires it to pay HK$500 if six-month HIBOR increases by 75 basis points over the next six months. Even though this contract does not have a notional, it contains a payment provision that does not move proportionally with the underlying. (vi) Provide additional disclosures When the sensitivity analysis is unrepresentative of a risk inherent in a financial instrument, disclosure of that fact and the reason why the entity believes the sensitivity analyses are unrepresentative shall be provided. [HKFRS 7(42)] Examples where this may be the case include: [HKFRS 7(IG37)] financial instruments contain terms and conditions whose effects are not apparent from the sensitivity analysis, e.g. options that are deep out of (or in) the money for the chosen change in risk variable; financial assets that are illiquid, such that the calculated changes in profit or loss are difficult to realise where there are low volumes of transactions or lack of counterparties to trade at those prices or rates; (c) large holdings in financial assets that would be sold at a discount or premium to the quoted prices. In these cases, additional disclosure may be provided of the terms and conditions of the financial instruments, the effect on profit or loss if the term or condition were met, description of how the risk is hedged and the reasons for illiquidity of the instruments concerned. [HKFRS 7(IG38 and IG39)] As an alternative to the sensitivity analysis, disclosure may be provided of a value-at-risk analysis that reflects interdependencies between risk variables. An entity may only disclose value-at-risk analysis where the entity uses such a model to manage risk internally. Disclosure shall include an explanation of the method used in preparing such an analysis, how the model works (such as whether the model is based on a delta-normal variance-covariance approach, historical simulation or Monte Carlo simulation), the main parameters and assumptions underlying the data provided such as the holding period, confidence interval, historical observation period and weightings assigned to the observations, how options are dealt with and which volatilities and correlations are used. Disclosure of the objective of the method used and of the limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved shall also be provided [HKFRS 7(41) and (B20)] 31

42 2.5 HKFRS 7 Disclosure checklist Although this checklist was up-to-date at the time of going to press, the HKICPA continues to refine its standards dealing with financial instruments. Accordingly, reference should be made to the most recent versions of those standards when financial statements are being prepared. HKFRS 7 Reference HKFRS 7 Disclosure Checklist 7 An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. Balance sheet Categories of financial assets and financial liabilities The carrying amounts of each of the following categories, as defined in HKAS 39, shall be disclosed either on the face of the balance sheet or in the notes: 8 financial assets at fair value through profit or loss, showing separately: i. those designated as such upon initial recognition; and ii. those classified as held for trading in accordance with HKAS 39; 8 8(c) 8(d) 8(e) held-to-maturity investments; (c) loans and receivables; (d) available-for-sale financial assets; (e) financial liabilities at fair value through profit or loss, showing separately: i. those designated as such upon initial recognition; and ii. those classified as held for trading in accordance with HKAS 39; 8(f) (f) financial liabilities measured at amortised cost. Financial assets or financial liabilities at fair value through profit or loss If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it shall disclose: 9 the maximum exposure to credit risk of the loan or receivable (or group of loans or receivables) at the reporting date; 36 Note: The maximum exposure to credit risk reported should not take account of any collateral held or other credit enhancements (e.g. netting agreements that do not qualify for offset in accordance with HKAS 32 (see also HKFRS 7(B9) and (B10)). 9 the amount by which any related credit derivatives or similar instruments mitigates that maximum exposure to credit risk; 32

43 HKFRS 7 Reference HKFRS 7 Disclosure Checklist 9(c) (c) the amount of change, during the period and cumulatively, in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset determined either: i. as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or ii. using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset. 9(c) Note: Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates. 9(d) (d) the amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated. If the entity has designated a financial liability as at fair value through profit or loss in accordance with paragraph 9 of HKAS 39, it shall disclose: 10 the amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in the credit risk of that liability determined either: i. as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (see also HKFRS 7(B4)); or ii. using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the liability. 10 Note: Changes in market conditions that give rise to market risk include changes in a benchmark interest rate, the price of another entity s financial instrument, a commodity price, a foreign exchange rate or an index of prices or rates. For contracts that include a unit-linking feature, changes in market conditions include changes in the performance of the related internal or external investment fund. 10 the difference between the financial liability s carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation. The entity shall disclose: the methods used to determine the amount of change that is attributable to changes in the credit risk in compliance with the requirements in paragraphs 9(c) and 10 of HKFRS 7 (see above). if the entity believes that the disclosure it has given to comply with the requirements in paragraph 9(c) or 10 of HKFRS 7 does not faithfully represent the change in the fair value of the financial asset or financial liability attributable to changes in its credit risk, the reasons for reaching this conclusion and the factors it believes are relevant. Reclassification 12 If the entity has reclassified a financial asset as one measured: at cost or amortised cost, rather than at fair value; or at fair value, rather than at cost or amortised cost, it shall disclose the amount reclassified into and out of each category and the reason for that reclassification. 33

44 HKFRS 7 Reference HKFRS 7 Disclosure Checklist Derecognition An entity may have transferred financial assets in such a way that part or all of the financial assets do not qualify for derecognition. The entity shall disclose for each class of such financial assets: (c) 13(d) the nature of the assets; the nature of the risks and rewards of ownership to which the entity remains exposed; (c) when the entity continues to recognise all of the assets, the carrying amounts of the assets and of the associated liabilities; and (d) when the entity continues to recognise the assets to the extent of its continuing involvement, the total carrying amount of the original assets, the amount of the assets that the entity continues to recognise, and the carrying amount of the associated liabilities. Collateral An entity shall disclose: the carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities, including amounts that have been reclassified in the balance sheet separately from other assets as the transferee has the right to sell or repledge the collateral. the terms and conditions relating to its pledge. When an entity holds collateral (of financial or non-financial assets) and is permitted to sell or repledge the collateral in the absence of default by the owner of the collateral, it shall disclose: (c) the fair value of the collateral held; the fair value of any such collateral sold or repledged, and whether the entity has an obligation to return it; and (c) the terms and conditions associated with its use of the collateral. Allowance account for credit losses 16 When financial assets are impaired by credit losses and the entity records the impairment in a separate account (e.g. an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in that account during the period for each class of financial assets. Compound financial instruments with multiple embedded derivatives 17 If an entity has issued an instrument that contains both a liability and an equity component and the instrument has multiple embedded derivatives whose values are interdependent (such as a callable convertible debt instrument), it shall disclose the existence of those features. Defaults and breaches For loans payable recognised at the reporting date, an entity shall disclose: (c) details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable; the carrying amount of the loans payable in default at the reporting date; and (c) whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorised for issue. 34

45 HKFRS 7 Reference HKFRS 7 Disclosure Checklist 19 If, during the period, there were breaches of loan agreement terms other than those described in paragraph 18 of HKFRS 7 (see above), an entity shall disclose the same information as required by paragraph 18 if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the reporting date). Income statement and equity Items of income, expense, gains or losses An entity shall disclose the following items of income, expense, gains or losses either on the face of the financial statements or in the notes: 20 net gains or net losses on: i. financial assets or financial liabilities at fair value through profit or loss, showing separately those on financial assets or financial liabilities designated as such upon initial recognition, and those on financial assets or financial liabilities that are classified as held for trading; ii. available-for-sale financial assets, showing separately the amount of gain or loss recognised directly in equity during the period and the amount removed from equity and recognised in profit or loss for the period; iii. held-to-maturity investments; iv. loans and receivables; and v. financial liabilities measured at amortised cost; 20 20(c) total interest income and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through profit or loss; (c) fee income and expense (other than amounts included in determining the effective interest rate) arising from: i. financial assets or financial liabilities that are not at fair value through profit or loss; and ii. trust and other fiduciary activities that result in the holding or investing of assets on behalf of individuals, trusts, retirement benefit plans, and other institutions; 20(d) 20(e) (d) accrued interest income on impaired financial assets; and (e) the amount of any impairment loss for each class of financial asset. 35

46 HKFRS 7 Reference HKFRS 7 Disclosure Checklist Other disclosures Accounting policies 21 In accordance with paragraph 108 of HKAS 1 Presentation of Financial Statements, an entity discloses, in the summary of significant accounting policies, the measurement basis (or bases) used in preparing the financial statements and the other accounting policies used that are relevant to an understanding of the financial statements, including: B5 for financial assets or financial liabilities designated as at fair value through profit or loss: (i) the nature of the financial assets or financial liabilities the entity has designated as at fair value through profit or loss; (ii) the criteria for so designating such financial assets or financial liabilities on initial recognition; and (iii) how the entity has satisfied the conditions for such designation including where appropriate a narrative description of the circumstances underlying the measurement or recognition inconsistency that would otherwise arise, or how designation at fair value through profit or loss is consistent with the entity s documented risk management or investment strategy. B5 B5(c) B5(d) the criteria for designating financial assets as available for sale. whether regular way purchases and sales of financial assets are accounted for at trade date or at settlement date. when an allowance account is used to reduce the carrying amount of financial assets impaired by credit losses: (i) the criteria for determining when the carrying amount of impaired financial assets is reduced directly (or, in the case of a reversal of a write-down, increased directly) and when the allowance account is used; and (ii) the criteria for writing off amounts charged to the allowance account against the carrying amount of impaired financial assets. B5(e) B5(f) B5(g) how net gains or net losses on each category of financial instrument are determined, for example, whether the net gains or net losses on items at fair value through profit or loss include interest or dividend income. the criteria the entity uses to determine that there is objective evidence that an impairment loss has occurred. when the terms of financial assets that would otherwise be past due or impaired have been renegotiated, the accounting policy for financial assets that are the subject of renegotiated terms. B5 Note: Paragraph 113 of HKAS 1 also requires entities to disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. 36

47 HKFRS 7 Reference HKFRS 7 Disclosure Checklist Hedge accounting An entity shall disclose the following separately for each type of hedge (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign operations): (c) a description of each type of hedge; a description of the financial instruments designated as hedging instruments and their fair values at the reporting date; and (c) the nature of the risks being hedged. For cash flow hedges, an entity shall disclose: (c) 23(d) 23(e) the periods when the cash flows are expected to occur and when they are expected to affect profit or loss; a description of any forecast transaction for which hedge accounting had previously been used, but which is no longer expected to occur; (c) the amount that was recognised in equity during the period; (d) the amount that was removed from equity and included in profit or loss for the period, showing the amount included in each line item in the income statement; and (e) the amount that was removed from equity during the period and included in the initial cost or other carrying amount of a non-financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction. An entity shall disclose separately: 24 in fair value hedges, gains or losses: i. on the hedging instrument; and ii. on the hedged item attributable to the hedged risk; 24 24(c) the ineffectiveness recognised in profit or loss that arises from cash flow hedges; and (c) the ineffectiveness recognised in profit or loss that arises from hedges of net investments in foreign operations. Fair value 25 Except as set out in paragraph 29 of HKFRS 7 (see below), for each class of financial assets and financial liabilities, an entity shall disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount. 26 Note: In disclosing fair values, an entity shall group financial assets and financial liabilities into classes, but shall offset them only to the extent that their carrying amounts are offset in the balance sheet. An entity shall disclose: 27 the methods and, when a valuation technique is used, the assumptions applied in determining fair values of each class of financial assets or financial liabilities. Note: For example, if applicable, an entity discloses information about the assumptions relating to prepayment rates, rates of estimated credit losses, and interest rates or discount rates. 37

48 HKFRS 7 Reference HKFRS 7 Disclosure Checklist 27 27(c) 27(d) 27(c) whether fair values are determined, in whole or in part, directly by reference to published price quotations in an active market or are estimated using a valuation. (c) whether the fair values recognised or disclosed in the financial statements are determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument (i.e. without modification or repackaging) and not based on available observable market data; (d) if paragraph 27(c) of HKFRS 7 applies (see above), the total amount of the change in fair value estimated using such a valuation technique that was recognised in profit or loss during the period. In the circumstances described in paragraph 27(c) of HKFRS 7 (see above), for fair values that are recognised in the financial statements, if changing one or more of those assumptions to reasonably possible alternative assumptions would change fair value significantly, the entity shall state this fact and disclose the effect of those changes. 27(c) Note: For this purpose, significance shall be judged with respect to profit or loss, and total assets or total liabilities, or, when changes in fair value are recognised in equity, total equity. If a difference exists between the fair value at initial recognition and the amount that would be determined at that date using a valuation technique (see note below), an entity shall disclose, by class of financial instrument: its accounting policy for recognising that difference in profit or loss to reflect a change in factors (including time) that market participants would consider in setting a price; and the aggregate difference yet to be recognised in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference. 28 Note: If the market for a financial instrument is not active, an entity establishes its fair value using a valuation technique. Nevertheless, the best evidence of fair value at initial recognition is the transaction price, unless the fair value of the instrument concerned is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. It follows that there could be a difference between the fair value at initial recognition and the amount that would be determined at that date using the valuation technique. Disclosures of fair value are not required: when the carrying amount is a reasonable approximation of fair value, for example, for financial instruments such as short-term trade receivables and payables; for an investment in equity instruments that do not have a quoted market price in an active market, or derivatives linked to such equity instruments, that is measured at cost because its fair value cannot be measured reliably; or 29(c) (c) for a contract containing a discretionary participation feature (as described in HKFRS 4 Insurance Contracts) if the fair value of that feature cannot be measured reliably. In the cases described in paragraphs 29 and (c) of HKFRS 7 (see above), an entity shall disclose information to help users of the financial statements make their own judgements about the extent of possible differences between the carrying amount of those financial assets or financial liabilities and their fair value, including: the fact that fair value information has not been disclosed for these instruments because their fair value cannot be measured reliably; a description of the financial instruments, their carrying amount, and an explanation of why fair value cannot be measured reliably; 38

49 HKFRS 7 Reference HKFRS 7 Disclosure Checklist 30(c) 30(d) 30(e) (c) information about the market for the instruments; (d) information about whether and how the entity intends to dispose of the financial instruments; and (e) if financial instruments whose fair value previously could not be reliably measured are derecognised, that fact, their carrying amount at the time of derecognition, and the amount of gain or loss recognised. Nature and extent of risks arising from financial instruments 31 An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date. Notes: The disclosures required by paragraphs 33 to 42 of HKFRS 7 (see below) focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk. B6 2. The disclosures required by paragraphs shall be either given in the financial statements or incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete. Qualitative disclosures For each type of risk arising from financial instruments, an entity shall disclose: (c) the exposures to risk and how they arise; its objectives, policies and processes for managing the risk and the methods used to measure the risk; and (c) any changes in 33 or (see above) from the previous period. Quantitative disclosures For each type of risk arising from financial instruments, an entity shall disclose: 34 summary quantitative data about its exposure to that risk at the reporting date. This disclosure shall be based on the information provided internally to key management personnel of the entity (as defined in HKAS 24 Related Party Disclosures), for example the entity s board of directors or chief executive officer. B7 Note: When an entity uses several methods to manage a risk exposure, the entity shall disclose information using the method or methods that provide the most relevant and reliable information. 34 the disclosures required by paragraphs 36 to 42 of HKFRS 7 (see below), to the extent not provided in paragraph 34 (see above), unless the risk is not material. 34 Note: See paragraphs 29 to 31 of HKAS 1 Presentation of Financial Statements for a discussion of materiality. 39

50 HKFRS 7 Reference HKFRS 7 Disclosure Checklist 34(c) B8 (c) concentrations of risk if not apparent from 34 and (see above), including: 1. a description of how management determines concentrations; 2. a description of the shared characteristic that identifies each concentration (e.g. counterparty, geographical area, currency or market); and 3. the amount of the risk exposure associated with all financial instruments sharing that characteristic. B8 Note: Concentrations of risk arise from financial instruments that have similar characteristics and are affected similarly by changes in economic or other conditions. The identification of concentrations of risk requires judgement taking into account the circumstances of the entity. 35 If the quantitative data disclosed as at the reporting date are unrepresentative of an entity s exposure to risk during the period, an entity shall provide further information that is representative. Credit risk An entity shall disclose by class of financial instrument: 36 the amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements (e.g. netting agreements that do not qualify for offset in accordance with HKAS 32 Financial Instruments: Presentation) (see also HKFRS 7(B9) and (B10)); B9, B10 Notes: 1. for a financial asset the entities maximum exposure to credit risk is typically the gross carrying amount net of any amounts offset in accordance with HKAS 32 and any impairment losses. 2. activities that give rise to credit risk include granting loans, receivables, financial guarantees, making irrevocable loan commitments and entering into derivative contracts. Further guidance is included in HKFRS 7(B10) (c) 36(d) in respect of the amount disclosed in 36 (see above), a description of collateral held as security and other credit enhancements; (c) information about the credit quality of financial assets that are neither past due nor impaired; and (d) the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated. Financial assets that are either past due or impaired An entity shall disclose by class of financial asset: (c) an analysis of the age of financial assets that are past due as at the reporting date but not impaired; an analysis of financial assets that are individually determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired; and (c) for the amounts disclosed in 37 and (see above), a description of collateral held by the entity as security and other credit enhancements and, unless impracticable, an estimate of their fair value. 40

51 HKFRS 7 Reference HKFRS 7 Disclosure Checklist Collateral and other credit enhancements obtained When an entity obtains financial or non-financial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements (e.g. guarantees), and such assets meet the recognition criteria in other Standards, an entity shall disclose: the nature and carrying amount of the assets obtained; and when the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations. Liquidity risk 39 B11 to B16 An entity shall disclose a maturity analysis for financial liabilities that shows the remaining contractual maturities. Notes: 1. an entity must use its judgement to determine an appropriate number of time bands; 2. when a counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which the entity can be required to pay; 3. when an entity is committed to make amounts available in instalments, each instalment is allocated to the earliest period in which the entity can be required to pay; 4. the amounts disclosed in the maturity analysis are the contractual undiscounted cash flows. Such undiscounted cash flows differ from the amount included in the balance sheet because the balance sheet amount is based on discounted cash flows; 5. if appropriate, an entity shall disclose the analysis of derivative financial instruments separately from that of non-derivative financial instruments in the contractual maturity analysis for financial liabilities; and 6. when the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date. Further guidance is included in HKFRS 7(B11) to (B16). 39 An entity shall disclose a description of how it manages the liquidity risk inherent in 39 (see above). Market risk B17 to B28 Sensitivity analysis Unless an entity complies with paragraph 41 of HKFRS 7 (see below), it shall disclose: 40 a sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date; 41

52 HKFRS 7 Reference HKFRS 7 Disclosure Checklist B17 to B28 Notes: 1. an entity decides how it aggregates information to display the overall picture without combining information with different characteristics about exposures to risks from significantly different economic environments. If an entity has exposure to only one type of market risk in only one economic environment, it would not show disaggregated information; 2. an entity discloses the effect on profit or loss and equity at the balance sheet date assuming that a reasonably possible change in the relevant risk variable had occurred at the balance sheet date and had been applied to the risk exposures in existence at that date; 3. an entity is not required to disclose the effect on profit or loss and equity for each change within a range of reasonably possible changes of the relevant risk variable. Disclosure of the effects of the changes at the limits of the reasonably possible range would be sufficient; and 4. an entity shall provide sensitivity analyses for the whole of its business, but may provide different types of sensitivity analysis for different classes of financial instruments. Further guidance is included in HKFRS 7(B17) to (B28) (c) the methods and assumptions used in preparing the sensitivity analysis; and (c) changes from the previous period in the methods and assumptions used, and the reasons for such changes. 41 If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks, it may use that sensitivity analysis in place of the analysis specified in paragraph 40 of HKFRS 7 (see above). B20 Notes: 1. This applies even if such a methodology measures only the potential for loss and does not measure the potential for gain. 2. An entity may also disclose the historical observation period and weightings applied to observations within that period, an explanation of how options are dealt with in the calculations, and which volatilities and correlations (or, alternatively, Monte Carlo probability distribution simulations) are used. The entity shall also disclose: an explanation of the method used in preparing such a sensitivity analysis, and of the main parameters and assumptions underlying the data provided; and an explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved. Other market risk disclosures 42 When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 of HKFRS 7 (see above) are unrepresentative of a risk inherent in a financial instrument (for example because the year-end exposure does not reflect the exposure during the year), the entity shall disclose that fact and the reason it believes the sensitivity analyses are unrepresentative. 42

53 HKFRS 7 Reference HKFRS 7 Disclosure Checklist Adoption of Standard before effective date 43 If an entity applies HKFRS 7 for a period beginning before 1 January 2007, it shall disclose that fact. Exemption in the first period of adoption before 1 January 2006 from presenting certain comparative information 44 If an entity applies HKFRS 7 for annual periods beginning before 1 January 2006, it need not present comparative information for the disclosures required by paragraphs 31 to 42 of the Standard about the nature and extent of risks arising from financial instruments (see above). 43

54 II. Listing Rules SEHK published a few amendments during the year, including amendments to the rules relating to the regulation of sponsors and compliance advisors, the electronic disclosure projects, the structured products and brokerage. All these amendments do not have a significant impact on the financial information presented by the listed issuers or new listing applicants. There are also certain consultation papers published by SEHK as follows: Consultation Paper on the Introduction of a Closing Auction Session This consultation paper proposes to introduce an end-of-day closing trading session for all securities which allows the input of orders into the SEHK s Automatic Order Matching and Execution System for a single price auction (closing auction session) after the completion of the continuous trading session. Consultation Paper on the Growth Enterprise Market The purpose of this paper is to put forward for SEHK s specific proposals for the further development of GEM. The proposals are at concept level, but the consultation paper is intended to provide sufficient detail to enable the reader to understand how GEM is intended to operate in future. Following confirmation of the concepts, SEHK will develop proposed rule changes and expose these rules in turn to the market for consultation. Consultation Paper on Periodic Financial Reporting The consultation paper sets out a number of proposals including: a) shortening reporting deadlines: half-year results announcements and reports by Main Board issuers reduced from three months to two months; annual results announcements and reports by Main Board issuers reduced from four months to three months; and no change to the reporting deadlines for half-year and annual reporting for GEM issuers; b) requiring quarterly reporting by Main Board issuers and reports must be published no more than 45 days after the financial period; and c) amending the current GEM Listing Rules to align the disclosure and publication requirements for quarterly reporting with the proposed Main Board quarterly reporting requirements as mentioned in above. If the proposals are adopted, SEHK plans to implement them in phases, commencing in Such proposal is still not yet finalised up to 8 January

55 Illustrative financial statements

56

57 The illustrative financial statements of Hong Kong GAAP Limited are intended to illustrate the presentation and disclosure requirements of Hong Kong Financial Reporting Standards (HKFRSs), the Hong Kong Companies Ordinance and the Listing Rules. They also contain additional disclosures that are considered to be best practice, particularly where such disclosures are included in illustrative examples provided with a specific standard. Hong Kong GAAP Limited is assumed to be a Bermuda incorporated company listed on the Main Board of The Stock Exchange of Hong Kong Limited. For those entities listed on the Growth Enterprise Market, specific disclosure requirements are set out in the GEM Rules. These are largely consistent with the requirements of the Listing Rules and, for readers convenience, cross-references to the GEM Rules have also been included in the illustrative financial statements and the presentation and disclosure checklist. Hong Kong GAAP Limited is assumed to have presented financial statements in accordance with HKFRSs for a number of years. Therefore, it is not a first-time adopter of HKFRSs. Readers should refer to HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards for specific requirements regarding an entity s first HKFRS financial statements, and to the HKFRS 1 section of the presentation and disclosure checklist included in this publication for details of the particular disclosure requirements applicable for firsttime adopters. The illustrative financial statements do not include separate financial statements for the parent, which may be required by local laws or regulations, or may be prepared voluntarily. Where an entity presents separate financial statements that comply with HKFRSs, the requirements of HKAS 27 Consolidated and Separate Financial Statements will apply. A separate income statement, balance sheet, statement of changes in equity and cash flow statement for the parent will generally be required, together with supporting notes. Suggested disclosures are cross-referenced to the underlying requirements in the texts of the relevant standards and interpretations, which are set out in the presentation and disclosure checklist. Note that in these illustrative financial statements, we have frequently included line items for which a nil amount is shown, so as to illustrate items that, although not applicable to Hong Kong GAAP Limited, are commonly encountered in practice. This does not mean that we have illustrated all possible disclosures. Nor should it be taken to mean that, in practice, entities are required to display line items for such nil amounts. For the purposes of presenting the income statement, statement of changes in equity and cash flow statement, the various alternatives allowed under HKFRSs for those statements have been illustrated. Preparers should select the alternatives most appropriate to their circumstances. 45

58 Contents Page 1. Index to the notes to the consolidated financial statements Corporate information Directors business review Corporate governance report Profiles of directors and senior management Directors report Independent auditor s report Consolidated income statement Alt 1 - Expenses analysed by function 63 Alt 2 - Expenses analysed by nature Consolidated balance sheet Changes in equity Alt 1 - Consolidated statement of changes in equity 67 Alt 2 - Consolidated statement of recognised income and expense Consolidated cash flow statement Alt 1 - Indirect method of reporting cash flows from operating activities 70 Alt 2 - Direct method of reporting cash flows from operating activities Notes to the consolidated financial statements Financial summary Particulars of major investment properties

59 Index to the notes to the consolidated financial statements Page 1. General Application of new and revised Hong Kong Financial Reporting Standards Significant accounting policies Critical accounting judgments and key sources of estimation uncertainty Revenue Business and geographical segments Investment and other income Other gains and losses Finance costs Income tax expense Discontinued operations Non-current assets held for sale Profit for the year Directors emoluments Employees emoluments Dividends Earnings per share Property, plant and equipment Prepaid lease payments Investment properties Goodwill Impairment testing on goodwill Other intangible assets Interests in associates Joint ventures Held-to-maturity investments Available-for-sale investments Finance lease receivables Deferred taxation Other financial assets/liabilities Inventories Loan receivables Amounts due from directors Trade and other receivables Amounts due from (to) customers for contract work Held-for-trading investments (other than derivatives) Bank balances/pledged bank deposits/bank overdrafts Trade and other payables Borrowings Obligations under finance leases Provisions

60 42. Share capital Share premium and reserves Convertible loan notes Capital risk management Financial instruments Acquisition of subsidiaries Disposal of a subsidiary Cash and cash equivalents Non-cash transactions Contingent liabilities and contingent assets Operating leases Commitments Pledge of assets Share-based payment transactions Retirement benefit plans Related party transactions Particulars of principal subsidiaries of the Company Balance sheet information of the Company Post balance sheet events

61 Hong Kong GAAP Limited Corporate information Board of directors Gary D.K. Wong, Chairman Daniel D.D. Lee Derek S.Y. Wong Tiara Cheung Florence K.Y. Tang John Banks Registered office 35 th Floor, The Pacific Tower 33 Front Street Hamilton HM12 Bermuda Company secretary William Y.S. Lee Registrars Hong Kong Registrars Limited Central Hong Kong Principal bankers Wan Chai Banking Corporation Kowloon Bank Limited Auditor Deloitte Touche Tohmatsu Solicitors Kwan, Lee & Wong 49

62 Hong Kong GAAP Limited Directors business review App GR Listed entities, whether listed on the Main Board or GEM, are required to present in their annual reports a separate statement containing a discussion and analysis of the entity s performance during the year and the material factors underlying its results and financial position. Both the Listing Rules and the GEM Rules set out a number of matters on which, as a minimum, the directors should comment in their review, including: the group s liquidity and financial resources; the capital structure of the group; the state of the group s order book; significant investments held and their performance; details of material acquisitions and disposals during the year; comments on segmental information; the number and remuneration of employees; details of charges on group assets; details of future plans for material investments or capital assets and sources of funding; gearing ratio; foreign exchange exposure and any related hedges; and details of contingent liabilities. There is no model for such a review. The analysis should focus on the key issues for the particular reporting entity. 50

63 Hong Kong GAAP Limited Corporate governance report App App 23.1 App 23.2 GR18.44(2) GR App 16.1 GR App 16.2 App 23.3 GR App 16.3 Listed entities, listed on the Main Board or GEM, are required to include a report on corporate governance practices in their annual reports. The report should contain at a minimum information of the following matters: corporate governance practices; directors securities transactions; the board of directors; chairman and chief executive officer; non-executive directors; remuneration of directors; nomination of directors; auditors remuneration; and audit committee. In addition, the report encourages disclosures regarding details of the following matters: share interests of senior management; shareholders rights; investor relations; internal controls; and management functions. There is no model for a corporate governance report. The content of this report should reflect the corporate governance practices of the particular reporting entity. The HKICPA published a guideline on internal controls titled Internal Control and Risk Management - A Basic Framework in order to provide guidance to entities on how to perform the review in relation to internal controls. 51

64 App GR Hong Kong GAAP Limited Profiles of directors and senior management Executive directors Independent non-executive directors Gary D.K. Wong, Chairman and Managing Director Mr. Gary D.K. Wong, 53, is a design engineer. He has been with the Group since its formation, holding a number of Board positions before becoming Managing Director in He has been with the Group for more than 10 years. Daniel D.D. Lee, Finance Director Mr. Daniel D.D. Lee, 49, is a chartered accountant and holds a business degree from the University of Ontario. He joined the Board as Finance Director in 1999, having previously held senior positions in a number of manufacturing entities. He has been with the Group for 9 years. Derek S.Y. Wong Mr. Derek S.Y. Wong, 44, is an executive director with special responsibility for product development. He is an electronic engineer with previous experience with multi-national conglomerates in the electronics industry. He joined the Board in 2002 and has over 5 year experiences in product development. Derek S.Y. Wong is a brother of Gary D.K. Wong. Tiara Cheung Ms. Tiara Cheung, 41, was appointed as a nonexecutive director in March 2000 and serves on the Audit Committee of the Company. She worked for a number of years in marketing and public relations positions with Secor Toys Limited before establishing a consultancy practice in Florence K.Y. Tang Ms. Florence K.Y. Tang, 54, is one of Hong Kong s leading residents with a distinguished record in the business community. She joined the Board as a non-executive director in 2004 and serves on the Audit Committee of the Company. She is a member of the Hong Kong Development Corporation and of the Community Development Project. John Banks Mr. John Banks, 45, was appointed as a nonexecutive director in April 2004 and serves on the Audit Committee of the Company. He is a chartered accountant and has many years of experience in corporate finance. Mr. Banks holds directorships in a number of public companies in Hong Kong. GR Senior management Bruno Gimeli Mr. Bruno Gimeli, 46, is the chief executive. He is primarily responsible for sales and marketing. He held senior marketing positions with a number of Hong Kong companies before joining the Company in Mr. William Y.S. Lee William Y.S. Lee, 42, is the chief financial controller and the qualified accountant responsible for the financial reporting procedures and internal controls. He also acts as the company secretary, and as the compliance officer responsible for liaison with The Stock Exchange of Hong Kong Limited. He joined the Company in He is an associate of the Hong Kong Institute of Certified Public Accountants and the Hong Kong Institute of Company Secretaries. 52

65 Hong Kong GAAP Limited Directors report s129d(1) s129d(3) The directors present their annual report and the audited consolidated financial statements for the year ended 31 December Principal activities The Company acts as an investment holding company and provides corporate management services. The activities of its principal subsidiaries, associates and jointly controlled entities are set out in notes 58, 24 and 25 respectively to the consolidated financial statements. In prior years, the Group was also engaged in the manufacture of bicycle and the construction businesses. These operations were discontinued in the current year (see note 11). s129d(3) s129d(3)(c) Results and appropriations The results of the Group for the year ended 31 December 2007 are set out in the consolidated income statement on page 63. The directors now recommend the payment of a final dividend of HK26.31 cents per share to the shareholders on the register of members on 25 May, 2008, amounting to approximately HK$4.688 million, and the retention of the remaining profit for the year of approximately HK$ million. s129d(3)(f) Fixed assets Details of the movements during the year in the fixed assets of the Group are set out in note 18 to the consolidated financial statements. s129d(3)(g) App 16.10(4) GR LR 10.06(4) GR 13.13(2) App GR GR GR Share capital Details of the movements during the year in the share capital of the Company are set out in note 42 to the consolidated financial statements. During the year, the Company repurchased certain of its own shares through The Stock Exchange of Hong Kong Limited, details of which are set out in note 42 to the consolidated financial statements. The directors considered that, as the Company s shares were trading at a discount to the net asset value per share, the repurchases would increase the net asset value per share of the Company. Distributable reserves of the Company The Company s reserves available for distribution to shareholders as at 31 December 2007 amounting to approximately HK$99 million (2006: HK$87 million). 53

66 Hong Kong GAAP Limited Directors report - continued Directors s129d(3)(i) The directors of the Company during the year and up to the date of this report were: Executive directors Gary D.K. Wong Daniel D.D. Lee Derek S.Y. Wong Independent non-executive directors Tiara Cheung Florence K.Y. Tang John Banks In accordance with the provisions of the Company s Articles of Association, Messr. Daniel D.D. Lee retires by rotation and, being eligible, offers himself for re-election. Directors service contracts App GR 18.24(1) No director proposed for re-election at the forthcoming annual general meeting has a service contract which is not determinable by the Group within one year without payment of compensation (other than statutory compensation). 54

67 Hong Kong GAAP Limited Directors report - continued App 16.13(1),(2) PN 5(3.2),(3.3) GR18.15(1),(2) GR GR 18.17A Directors and chief executive s interests in shares and share options At 31 December 2007, the interests of certain directors and Mr. Bruno Gimeli, the chief executive of the Company and their associates in the shares and share options of the Company and its associated corporations, as recorded in the register maintained by the Company pursuant to Section 352 of the Securities and Futures Ordinance, or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, were as follows: Long positions Ordinary shares of HK$1 each of the Company Percentage Number of of the issued issued ordinary share capital of Name Capacity shares held the Company Directors Mr. Gary D.K. Wong Beneficial owner 45, % Held by spouse 35, % Held by controlled corporation (Note 1) 10,570, % 10,650, % Mr. Daniel D.D. Lee Beneficial owner 124, % Held by spouse 4, % Held by controlled corporation (Note 2) 249, % 377, % 55

68 Hong Kong GAAP Limited Directors report - continued SFO s308 GR Share options Number of Number of Name Capacity options held underlying shares Directors Mr. Gary D.K. Wong Beneficial owner 60,000 60,000 Mr. Daniel D.D. Lee Held by spouse 40,000 40,000 Held by controlled corporations (Note 2) 20,000 20,000 Chief executive 120, ,000 Mr. Bruno Gimeli Beneficial owner 60,000 60,000 Notes: 1. Mr. Gary D.K. Wong is deemed to be interested in 10,570,000 ordinary shares of the Company through his beneficial interests in the following corporations: Percentage of the issued share capital of the corporation Number of shares held ABC Inc. 35% 55,000 XYE Company Limited 35% 106,000 Group Holdings Limited 60% 10,409,000 10,570, Mr. Daniel D.D. Lee beneficially owns 10,000 shares of HK$1 each in AAA Co. Ltd., representing approximately 40% of the issued share capital of that company. AAA Co. Ltd. beneficially owns 249,000 ordinary shares of the Company and 20,000 options to acquire shares of the Company. App 16.13(1),(2) GR 18.15(1),(2) Other than the holdings disclosed above and nominee shares in certain subsidiaries held in trust for the Group, none of the directors, chief executive and their associates, had any interests or short positions in any shares, underlying shares or debentures of the Company or any of its associated corporations as at 31 December

69 Hong Kong GAAP Limited Directors report - continued Share options The Company LR GR LR GR PN 5(3.3)(1) Note 3 GR 18.17A(1) Note 3 GR 18.28(7) Particulars of the Company s share option scheme are set out in note 55 to the consolidated financial statements. The following table discloses movements in the Company s share options during the year: Category 1: Directors and chief executive Outstanding Granted Exercised Forfeited Expired Outstanding Option at beginning during during during during at end of type of year year year year year year Mr. Gary D.K. Wong 2006A 80,000 - (80,000) B 75,000 - (75,000) , ,000 Mr. Daniel D.D. Lee 2006A 30,000 - (30,000) , ,000 Mr. Bruno Gimeli , ,000 Total directors and chief executive 185, ,000 (185,000) ,000 PN 5(3.4)(1) Note 4 GR 18.17B(1) Note 3 Category 2: Substantial shareholders Mr. Francis F.G. Chan 2006A 15,000 - (15,000) Total substantial shareholders 15,000 - (15,000) Category 3: Employees 2006A 15,000 - (15,000) B 75,000 - (75,000) ,000 (24,000) ,000 Total employees 90,000 40,000 (114,000) ,000 Total all categories 290, ,000 (314,000) ,000 LR 17.07(2) GR 23.07(2) LR 17.07(3) GR 23.07(3) The closing price of the Company s shares immediately before 31 March 2007, the date of grant of the 2007 options, was HK$1.15. The weighted average closing price of the Company s shares immediately before the dates on which the share options were exercised was HK$

70 Hong Kong GAAP Limited Directors report - continued The subsidiary LR GR LR GR Particulars of the share option scheme of Kowloon Limited, a subsidiary of the Company (listed on the GEM Board of The Stock Exchange of Hong Kong Limited), are set out in note 55 to the consolidated financial statements. The following table discloses movements in Kowloon Limited s share options during the year: Outstanding Granted Exercised Forfeited Expired Outstanding Option at beginning during during during during at end of type of year year year year year year Employees , ,000 s129d(3)(k) Arrangements to purchase shares or debentures Other than the option holdings disclosed above, at no time during the year was the Company, its holding company, or any of its subsidiaries or fellow subsidiaries, a party to any arrangements to enable the directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate. s129d(3)(j) App GR s162a(1) s129d(3)(ia) Directors interests in contracts of significance No contract of significance to which the Company, its holding company, fellow subsidiaries or subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. Management contract A.B. Consultant Company Limited has a management services contract with the Group for a period of three years starting from 1 January Mr. Gary D.K. Wong is a director and controlling shareholder of that company which received management service fees amounting to HK$240,000 (2006: HK$240,000) during the year. 58

71 Hong Kong GAAP Limited Directors report - continued App 16.13(3) PN 5(3.2), (3.4) GR GR GR 18.17B Substantial shareholders As at 31 December 2007, the register of substantial shareholders maintained by the Company pursuant to Section 336 of the Securities and Futures Ordinance shows that other than the interests disclosed above in respect of certain directors and the chief executive, the following shareholders had notified the Company of relevant interests in the issued share capital of the Company. Long positions Ordinary shares of HK$1 each of the Company Percentage Number of of the issued issued ordinary share capital of Name of shareholder Capacity shares held the Company Mr. Francis F.G. Chan Held by controlled 2,263, % corporation (note) Group Holdings Limited Beneficial owner 10,409, % Share options Number of Number of Name of shareholder Capacity share options underlying shares Mr. Francis F.G. Chan Held by controlled - - corporation (note) Note: Mr. Francis F.G. Chan beneficially owns 100 shares of HK$1 each in YZ Limited, representing approximately 60% of the issued share capital of that company. YZ Limited beneficially owns 2,263,000 ordinary shares of the Company. Other than as disclosed above, the Company has not been notified of any other relevant interests or short positions in the issued share capital of the Company as at 31 December

72 Hong Kong GAAP Limited Directors report - continued App 16.12B GR 18.39B App 16.8(1)&(2) LR 14A.45 LR 14A.46 GR 18.09(1),(2) GR GR LR 8.10(2)&(c) GR GR App 16.24B GR 18.29A Independent non-executive directors The Company has received, from each of the independent non-executive directors, an annual confirmation of his independence pursuant to Rule 3.13 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. The Company considers all of the independent non-executive directors are independent. Connected transaction On 5 January 2007, the Company acquired a property in Shatin from XYZ Company Limited, a company in which Mr. Gary D.K. Wong has a controlling interest. The consideration of HK$1,000,000 was based on an independent valuation carried out by Messrs R & P Trent, Chartered Surveyors. Interests in competitors Mr. Derek S.Y. Wong holds a 80% interest in MNO Ltd., a company engaged in the manufacture of toys and which therefore competes with the Group in certain aspects of its business. Emolument policy The emolument policy for the employees of the Group is set up by the Remuneration Committee on the basis of their merit, qualifications and competence. The emoluments of the directors of the Company are decided by the Remuneration Committee, having regard to the Group s operating results, individual performance and comparable market statistics. The Company has adopted a share option scheme as an incentive to directors and eligible employees, details of the scheme is set out in note 55 to the consolidated financial statements. App GR GR 17.27(2) App 16.34A LR s129d(3)(d),(e) Pre-emptive rights There are no provisions for pre-emptive rights under the Company s bye-laws, or the laws of Bermuda, which would oblige the Company to offer new shares on a pro-rata basis to existing shareholders. Sufficiency of public float The Company has maintained a sufficient public float throughout the year ended 31 December Charitable donations During the year, the Group made charitable donations amounting to HK$250,

73 Hong Kong GAAP Limited Directors report - continued Major customers and suppliers Details of the Group s transactions with its major suppliers and customers during the year are set out below: App 16.31(1),(2) GR 18.40(1),(2) App 16.31(3),(4) GR 18.40(3),(4) App 16.31(5) GR 18.40(5) s129d(3)(l) An improvement in the economic climate during the past 18 months has given rise to the emergence of many small businesses. This increased competition has enabled the Group to source its raw material requirements from a number of companies at a fair market price. This has had the effect of reducing purchases from the Group s largest supplier from 20% of total purchases in 2006 to 15% in the current year. In 2007, the 5 largest suppliers comprised 34% of the Group s total purchases (2006: 39%), evidencing the purchasing department s commitment to ensuring that the Group is not dependent on any one supplier, and that our purchases are at a fair market price. In 2007, the Group s largest customer accounted for 22% of turnover (2006: 22%). The 5 largest customers remain the same as 2006, although their combined contribution to total sales has decreased slightly from 45% to 42% in the current year. At no time during the year did a director, an associate of a director or a shareholder of the Company (which to the knowledge of the directors owns more than 5% of the Company s share capital) have an interest in any of the Group s five largest suppliers or customers. Post balance sheet events Details of significant events occurring after the balance sheet date are set out in note 60 to the consolidated financial statements. Auditor A resolution will be submitted to the annual general meeting to re-appoint Messrs. Deloitte Touche Tohmatsu as auditor of the Company. s129d(2) On behalf of the Board Gary D.K. Wong Chairman 21 January

74 HKSA 700(18) Hong Kong GAAP Limited Independent auditor s report HKSA 700(20) HKSA 700(22) To the members of Hong Kong GAAP Limited (incorporated in Bermuda with limited liability) We have audited the consolidated financial statements of Hong Kong GAAP Limited (the Company ) and its subsidiaries (collectively referred to as the Group ) set out on pages 63 to 173 which comprise the consolidated balance sheet as at 31 December 2007, and the consolidated income statement, the [consolidated statement of changes in equity/statement of recognised income and expense] and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors responsibility for the consolidated financial statements HKSA 700(28) The directors of the Company are responsible for the preparation and the true and fair presentation of these consolidated financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility HKSA 700(32) HKSA 700(34) Professional Risk Management Bulletin No. 2 HKSA 700(37) HKSA 700(38) Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and true and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion s141(3) HKSA 700(39),(40) HKSA 700(50) HKSA 700(57) In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group as at 31 December 2007 and of the Group s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong HKSA 700(52) 21 January

75 HKAS 1.8 HKAS 1.46,(c) HKAS HKAS 1.46(d),(e) Hong Kong GAAP Limited Consolidated income statement for the year ended 31 December 2007 [Alt 1] NOTES HK$ 000 HK$ 000 Continuing operations HKAS 1.81 HKAS 1.88 HKAS 1.83 HKAS 1.83 HKAS 1.83 HKAS 1.88 HKAS 1.88 HKAS 1.81(c) HKAS 1.81 HKAS 1.88 HKAS 1.83 HKAS 1.81(e) HKAS 1.83 Revenue 5 140, ,840 Cost of sales (87,899) (91,840) Gross profit 53,019 60,000 Investment and other income 7 4,339 3,330 Other gains and losses Distribution and selling expenses (5,087) (4,600) Administrative expenses (16,422) (19,572) Share of profits of associates 1,186 1,589 Finance costs 9 (5,034) (6,023) Other expenses (2,656) (2,612) Profit before tax 29,548 32,138 Income tax expense 10 (11,306) (11,801) Profit for the year from continuing operations 18,242 20,337 Discontinued operations HKAS 1.81(d) HKFRS 5.33 HKAS 1.81(f) Profit for the year from discontinued operations 11 8,310 9,995 Profit for the year 13 26,552 30,332 Attributable to: HKAS 1.82 HKAS 1.82 HKAS Equity holders of the Company 22,552 27,569 Minority interests 4,000 2,763 26,552 30,332 HKAS 33.66&67 App 16.4(1)(g) GR 18.50B(1)(m) Earnings per share 17 From continuing and discontinued operations Basic (HK cents per share) Diluted (HK cents per share) From continuing operations Basic (HK cents per share) Diluted (HK cents per share) Note: The format outlined above aggregates expenses according to their function. 63

76 HKAS 1.8 HKAS 1.46,(c) HKAS HKAS 1.46(d),(e) Hong Kong GAAP Limited Consolidated income statement for the year ended 31 December 2007 [Alt 2] NOTES HK$ 000 HK$ 000 Continuing operations HKAS 1.81 HKAS 1.83 HKAS 1.83 HKAS 1.88 HKAS 1.88 HKAS 1.88 HKAS 1.88 HKAS 1.88 HKAS 1.81(c) HKAS 1.81 HKAS 1.88 HKAS 1.83 HKAS 1.81(e) HKAS 1.83 Revenue 5 140, ,840 Investment and other income 7 4,339 3,330 Other gains and losses Changes in inventories of finished goods and work in progress 1,270 2,118 Raw materials and consumables used (78,785) (85,406) Employee benefits expense (9,803) (11,655) Depreciation and amortisation expense (12,412) (13,878) Share of profits of associates 1,186 1,589 Finance costs 9 (5,034) (6,023) Other expenses (12,334) (9,803) Profit before tax 29,548 32,138 Income tax expense 10 (11,306) (11,801) Profit for the year from continuing operations 18,242 20,337 Discontinued operations HKAS 1.81(d) HKFRS 5.33 HKAS 1.81(f) Profit for the year from discontinued operations 11 8,310 9,995 Profit for the year 13 26,552 30,332 Attributable to: HKAS 1.82 HKAS 1.82 HKAS Equity holders of the Company 22,552 27,569 Minority interests 4,000 2,763 26,552 30,332 Earnings per share 17 HKAS 33.66&67 App 16.4(1)(g) GR 18.50B(1)(m) From continuing and discontinued operations Basic (HK cents per share) Diluted (HK cents per share) From continuing operations Basic (HK cents per share) Diluted (HK cents per share) Note: The format outlined above aggregates expenses according to their nature. 64

77 HKAS 1.8 HKAS 1.46,(c) Hong Kong GAAP Limited Consolidated balance sheet at 31 December 2007 HKAS HKAS 1.46(d),(e) NOTES HK$ 000 HK$ 000 HKAS 1.51 HKAS 1.68 HKAS 1.69 HKAS 1.68 HKAS 1.69 HKAS 1.68(c) HKAS 1.68(e) HKAS 1.68(d), 69 HKAS 1.68(d), 69 HKAS 1.69 HKAS 1.68(n), 70 HKAS 1.68(d), 69 Non-current Assets Property, plant and equipment , ,461 Prepaid lease payments 19 2,900 3,000 Investment properties Goodwill 21 20,253 24,060 Other intangible assets 23 9,739 11,325 Interests in associates 24 8,425 7,269 Held-to-maturity investments 26 2,059 1,658 Available-for-sale investments 27 8,140 7,858 Finance lease receivables Deferred tax assets Other financial assets HKAS 1.51 Current Assets 160, ,620 HKAS 1.68(g) HKAS 1.69 HKAS 1.68(d), 69 HKAS 1.69 HKAS 1.68(h) HKAS 1.69 HKAS 1.69 HKAS 1.68(d), 69 HKAS 1.68(d), 69 HKAS 1.68(d), 69 HKAS 1.69 HKAS 1.68(i) HKAS 1.68A HKFRS 5.38 Inventories 31 18,884 21,794 Finance lease receivables Loan receivables 32 2,981 2,981 Amounts due from directors Trade and other receivables 34 18,350 16,062 Amounts due from customers for contract work Tax recoverable Held-to-maturity investments 26 4,804 3,604 Held-for-trading investments 36 12,480 8,448 Other financial assets Pledged bank deposits 37 2,000 2,000 Bank balances and cash 37 18,199 17,778 79,193 73,509 Assets classified as held for sale 12 22,336 - HKAS 1.51 Current Liabilities 101,529 73,509 HKAS 1.69 HKAS 1.68(j) HKAS 1.68(m) HKAS 1.69 HKAS 1.69 HKAS 1.68(k) HKAS 1.68(l), 69 HKAS 1.68(i), 69 HKAS 1.68A HKFRS 5.38 Amounts due to customers for contract work Trade and other payables 38 16,366 21,223 Tax liabilities 5,133 5,868 Borrowings 39 21,899 25,168 Obligations under finance leases Provisions 41 3,461 3,247 Other financial liabilities Bank overdrafts ,546 55,971 Liabilities associated with assets classified as held for sale 12 3,684-51,230 55,971 App 16.4(2)(d) GR 18.50B(2)(d) App 16.4(2)(e) GR 18.50B(2)(e) Net Current Assets 50,299 17,538 Total Assets less Current Liabilities 211, ,158 65

78 Hong Kong GAAP Limited Consolidated balance sheet at 31 December continued NOTES HK$ 000 HK$ 000 Capital and Reserves HKAS 1.69 HKAS 1.69 HKAS 1.68(p) HKAS 1.69 HKAS 1.68(o) Share capital 42 17,819 23,005 Share premium and reserves , ,029 Equity attributable to equity holders of the Company 147, ,034 Share options reserve of a subsidiary Minority interests 23,505 19,505 Total equity 171, ,039 HKAS 1.51 HKAS 1.68(n), 70 HKAS 1.69 HKAS 1.68(l), 69 HKAS 1.69 HKAS 1.68(k) HKAS 1.69 HKAS 1.68(l), 69 Non-current Liabilities Deferred tax liabilities 29 4,591 3,693 Borrowings 39 28,642 31,713 Convertible loan notes 44 4,144 - Obligations under finance leases Provisions 41 2,298 2,326 Retirement benefit obligations Other financial liabilities ,188 38, , ,158 HKAS The consolidated financial statements on pages 63 to 173 were approved and authorised for issue by the board of directors on 21 January 2008 and are signed on its behalf by: s129b(1) Gary D.K. Wong Daniel D.D. Lee Chairman and managing director Finance director 66

79 Hong Kong GAAP Limited HKAS 1.8(c)(i) HKAS 1.46, (c) Consolidated statement of changes in equity for the year ended 31 December 2007 [Alt 1] Attributable to equity holders of the Company HKAS 1.97, (c) HKAS 1.46(d), (e) Convertible loan notes Properties Investments Share Share options Share Share equity revaluation revaluation Translation options Hedging Retained reserve of a Minority capital premium reserve reserve reserve reserve reserve reserve profits Total subsidiary interests Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,005 26, , ,294-16, ,036 HKAS 1.96 HKFRS 7.23(c) HKFRS 7.20(ii) HKAS 1.96 HKAS 1.96 Surplus on revaluation of properties , , ,643 Gain on cash flow hedges Gain on fair value changes of available-for-sale investments Exchange differences arising on translation of foreign operations Deferred tax (493) (24) - - (95) - (612) - - (612) HKAS 1.96 Net income (expense) recognised , , ,513 directly in equity HKAS 1.96 HKFRS 7.20(ii) HKFRS 7.23(d) HKFRS 7.23(e) Profit for the year ,569 27,569-2,763 30,332 Transfer to profit or loss on sale of available-for-sale investments Transfer to profit or loss on cash flow hedges (287) - (287) - - (287) Transfer to initial carrying amount of non-financial items on cash flow hedges Deferred tax on transfer to profit or loss HKAS 1.96(c) Total recognised income for the year , ,569 28,881-2,763 31,644 HKAS 1.97 HKAS 1.97 Recognition of equity-settled share based payments Dividends recognised as distribution (6,479) (6,479) - - (6,479) At 31 December ,005 26,474-1, , , , ,039 67

80 Hong Kong GAAP Limited HKAS 1.8(c)(i) HKAS 1.46, (c) Consolidated statement of changes in equity for the year ended 31 December continued [Alt 1] Attributable to equity holders of the Company Convertible loan notes Properties Investments Share Share options Share Share equity revaluation revaluation Translation options Hedging Retained reserve of a Minority capital premium reserve reserve reserve reserve reserve reserve profits Total subsidiary interests Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,005 26,474-1, , , , ,039 HKFRS 7.23(c) HKFRS 7.20(ii) HKAS 1.96 HKAS 1.96 Gain on cash flow hedges Gain on fair value changes of available-for-sale investments Exchange differences arising on translation of foreign operations Deferred tax (28) - - (131) - (159) - - (159) HKAS 1.96 Net income (expenses) recognised directly in equity HKAS 1.96 HKFRS 7.23(d) HKFRS 7.23(e) Profit for the year ,552 22,552-4,000 26,552 Transfer to profit or loss on cash flow hedges (380) - (380) - - (380) Transfer to initial carrying amount of non-financial items on cash flow hedges Deferred tax on transfer to profit or loss Transfer to profit or loss on disposal of foreign operations (120) (120) - - (120) HKAS 1.96(c) Total recognised income and expense for the year (31) ,552 22,626-4,000 26,626 HKAS 1.97 HKAS 1.97 HKAS 1.97 HKAS 1.97 HKAS 1.97 HKAS 1.97 HKAS 1.97 HKAS 1.97 Recognition of equity-settled share based payments Issue of ordinary shares upon exercise of share options (361) Transaction costs attributable to issue of new shares - (6) (6) - - (6) Repurchase of shares (5,500) (10,848) (555) (16,903) - - (16,903) Transaction costs attributable to repurchase of shares - (193) (193) - - (193) Issue of convertible notes Dividends recognised as distribution (6,635) (6,635) - - (6,635) Transfer to retained profits (3) Deferred tax - - (242) (242) - - (242) At 31 December ,819 15, , , , , ,040 Note: See next page for the discussion of the format of the statement of changes in equity. 68

81 HKAS 1.8(c)(ii) HKAS 1.46,(c) Hong Kong GAAP Limited Consolidated statement of recognised income and expense for the year ended 31 December 2007 [Alt 2] HK$ 000 HK$ 000 HKAS 16.77(f) HKFRS 7.23(c) HKFRS 7.20(ii) HKAS HKAS 19.93B HKAS 1.96 HKAS 1.96 HKAS 1.96 HKFRS 7.20(ii) HKFRS 7.23(d) HKFRS 7.23(e) HKAS 1.96(c) HKAS 1.96(c) Surplus on revaluation of properties - 1,643 Gain on cash flow hedges Gain on fair value changes of available-for-sale investments Exchange differences arising on translation of foreign operations Actuarial gains (losses) on defined benefit plans (see note below) - - Deferred tax (159) (612) Net income recognised directly in equity 460 1,513 Profit for the year 26,552 30,332 Transfer to profit or loss on sale of available-for-sale investments - - Transfer to profit or loss on cash flow hedges (380) (287) Transfer to initial carrying amount of non-financial items on cash flow hedges - - Deferred tax on transfer to profit or loss Transfer to profit or loss on disposal of foreign operations (120) - Total recognised income for the year 26,626 31,644 Attributable to: Equity holders of the Company 22,626 28,881 Minority interests 4,000 2,763 26,626 31,644 Note: HKAS 1 requires that the financial statements should include a statement showing either all changes in equity, or changes in equity other than those arising from capital transactions with owners and distributions to owners. The above illustrates an approach which presents those changes in equity that represent income and expense in a separate component of the financial statements. If this method of presentation is adopted, a reconciliation of the opening and closing balances of share capital, reserves and retained profits is required to be provided in the explanatory notes (see notes 42 and 43). An alternative method of presenting changes in equity is illustrated on the previous page. The format of the statement is generally an accounting policy choice. However, where the entity has selected the option available under paragraph 93A of HKAS 19, Employee Benefits, to recognise actuarial gains and losses outside profit or loss, those actuarial gains and losses are required to be presented in a statement of recognised income and expense as illustrated above. The entity is not permitted to present such changes in a statement of changes in equity as illustrated in Alt 1 on the previous pages. 69

82 HKAS 1.8(d) HKAS 1.46,(c) HKAS HKAS 1.46(d), (e) HKAS 7.10 HKAS 7.18 Hong Kong GAAP Limited Consolidated cash flow statement for the year ended 31 December 2007 [Alt 1] Operating activities NOTES HK$ 000 HK$ 000 Profit for the year 26,552 30,332 Adjustments for: Income tax expense 14,466 14,799 Finance costs 5,184 6,157 Investment income (3,608) (2,351) Gain on disposal of property, plant and equipment (6) (67) Loss (gain) on fair value changes of investment property 6 (8) Gain on disposal of discontinued operations (1,940) - Impairment loss recognised in respect of trade receivables Share of profits of associates (1,186) (1,589) Depreciation and amortisation 14,179 17,350 Amortisation of prepaid lease payments Impairment loss in respect of property, plant and equipment 1,204 - Impairment loss in respect of goodwill 15 - Net foreign exchange (gain)/loss (144) 68 Equity-settled share-based payments expenses Development costs expensed Operating cash flows before movements in working capital 55,570 66,489 (Increase) decrease in trade and other receivables (3,943) 2,195 Increase in inventories (628) (2,008) Increase in held-for-trading investments (4,032) (490) Decrease in trade and other payables (713) (2,627) Increase (decrease) in provisions 113 (262) Decrease in retirement benefit obligations Increase in amount due from (to) customers for contract work 11 - Other [describe] - - Cash generated from operations 46,534 63,297 HKAS 7.31 HKAS 7.35 Interest paid (5,240) (6,184) Income taxes paid (13,619) (10,038) Net cash generated by operating activities 27,675 47,075 70

83 HKAS 1.8(d) HKAS 1.46,(c) Hong Kong GAAP Limited Consolidated cash flow statement for the year ended 31 December continued [Alt 1] NOTES HK$ 000 HK$ 000 HKAS 7.10 HKAS 7.31 HKAS HKAS 7.31 HKAS 7.39 HKAS 7.39 Investing activities Purchase of available-for-sale investments (188) (3,762) Purchase of held-to-maturity investments (1,489) - Redemption of held-to-maturity investments - 4,000 Interest received 2,315 1,304 Royalties and other investment income received 1, Dividends received from associates Other dividends received Amounts advanced to related parties (5,637) (5,088) Proceeds from repayment of related party loans 5,088 2,355 Purchase of property, plant and equipment (22,983) (11,902) Purchase of investment properties (10) (12) Increase in finance lease receivables (123) - Proceeds from disposal of property, plant and equipment 8,612 22,295 Development costs paid (508) (798) Acquisition of subsidiaries 47 (622) - Disposal of a subsidiary 48 7,566 - Net cash (used in)/generated by investing activities (6,656) 9,450 HKAS 7.10 HKAS 7.31 Financing activities Proceeds from issue of ordinary shares Proceeds from issue of convertible loan notes 4,950 - Payment for share issue expenses (6) - Payment for repurchase of shares to: - equity holders of the Company (16,903) - - minority interests - - Payment for share repurchase expenses (193) - Proceeds from borrowings 15,000 12,265 Repayment of borrowings (16,403) (61,622) Payment for debt issue costs (595) - Repayment of obligations under finance leases (75) (88) Proceeds from settlement of derivatives Payment for settlement of derivatives (119) (277) Dividends paid to: - equity holders of the Company (6,635) (6,479) - minority interests - - Net cash used in financing activities (20,535) (55,964) HKAS 7.28 HKAS 7.45 Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 17,400 16,864 Effects of exchange rate changes on the balance of cash held in foreign currencies (48) (25) Cash and cash equivalents at the end of the financial year 49 17,836 17,400 Note: The above illustrates the indirect method of reporting cash flows from operating activities. 71

84 HKAS 1.8(d) HKAS 1.46,(c) HKAS HKAS 1.46(d), (e) HKAS 7.10 HKAS 7.18 Hong Kong GAAP Limited Consolidated cash flow statement for the year ended 31 December 2007 [Alt 2] Operating activities NOTES HK$ 000 HK$ 000 Receipts from customers 211, ,487 Payments to suppliers and employees (160,957) (150,990) Net cash outflow for held for trading investments (3,943) (200) Cash generated from operations 46,534 63,297 HKAS 7.31 HKAS 7.35 Interest paid (5,240) (6,184) Income taxes paid (13,619) (10,038) Net cash generated by operating activities 27,675 47,075 HKAS 7.10 HKAS 7.31 HKAS HKAS 7.31 HKAS 7.39 HKAS 7.39 Investing activities Purchase of available-for-sale investments (188) (3,762) Purchase of held-to-maturity investments (1,489) - Redemption of held-to-maturity investments - 4,000 Interest received 2,315 1,304 Royalties and other investment income received 1, Dividends received from associates Other dividends received Amounts advanced to related parties (5,637) (5,088) Proceeds from repayment of related party loans 5,088 2,355 Purchase of property, plant and equipment (22,983) (11,902) Purchase of investment properties (10) (12) Increase in finance lease receivables (123) - Proceeds from disposal of property, plant and equipment 8,612 22,295 Development costs paid (508) (798) Acquisition of subsidiaries 47 (622) - Disposal of a subsidairy 48 7,566 - Net cash (used in)/generated by investing activities (6,656) 9,450 72

85 Hong Kong GAAP Limited Consolidated cash flow statement for the year ended 31 December continued [Alt 2] NOTES HK$ 000 HK$ 000 HKAS 7.10 HKAS 7.31 Financing activities Proceeds from issues of ordinary shares Proceeds from issue of convertible loan notes 4,950 - Payment for share issue expenses (6) - Payment for repurchase of shares to: - equity holders of the Company (16,903) - - minority interests - - Payment for shares repurchase expenses (193) - Proceeds from borrowings 15,000 12,265 Repayment of borrowings (16,403) (61,622) Payment for debt issue costs (595) - Repayment of obligations under finance leases (75) (88) Proceeds from settlement of derivatives Payment for settlement of derivatives (119) (277) Dividends paid to: - equity holders of the Company (6,635) (6,479) - minority interests - - Net cash used in financing activities (20,535) (55,964) HKAS 7.28 HKAS 7.45 Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 17,400 16,864 Effects of exchange rate changes on the balance of cash held in foreign currencies (48) (25) Cash and cash equivalents at the end of the financial year 49 17,836 17,400. Note: The above illustrates the direct method of reporting cash flows from operating activities. 73

86 HKAS 1.8(e) HKAS 1.46,(c) HKAS 1.103,(c) s129a(1) HKAS1.126,(c) HKAS HKAS HKAS HKAS 8.28 Sch 10: 17(6) App 16 Note 2.2 GR Note Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December General The Company is incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited. Its parent and ultimate holding company is Group Holdings Limited (incorporated in the British Virgin Islands). The addresses of the registered office and principal place of business of the Company are disclosed in the corporate information section of the annual report. The consolidated financial statements are presented in Hong Kong dollars, which is the same as the functional currency of the Company. The principal activities of the Company and its subsidiaries (the Group ) are the manufacture and sale of widgets and toys. The Group was also engaged in the manufacture of bicycles and construction businesses, which were discontinued in current year (see note 11). 2. Application of new and revised Hong Kong Financial Reporting Standards ( HKFRSs ) In the current year, the Group has applied, for the first time, the following new standard, amendment and interpretations ( new HKFRSs ) issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ), which are effective for the Group s financial year beginning 1 January HKAS 1 (Amendment) Capital Disclosures HKFRS 7 Financial Instruments: Disclosures HK(IFRIC) Int 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies HK(IFRIC) Int 8 Scope of HKFRS 2 HK(IFRIC) Int 9 Reassessment of Embedded Derivatives HK(IFRIC) Int 10 Interim Financial Reporting and Impairment The adoption of the new HKFRSs had no material effect on how the results and financial position for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required. The Group has applied the disclosure requirements under HKAS 1 (Amendment) and HKFRS 7 retrospectively. Certain information presented in prior year under the requirements of HKAS 32 has been removed and the relevant comparative information based on the requirements of HKAS 1 (Amendment) and HKFRS 7 has been presented for the first time in the current year. 74

87 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 8.30 HKAS 8.31 The Group has not early applied the following new and revised standards or interpretations that have been issued but are not yet effective. HKAS 1 (Revised) Presentation of Financial Statements 1 HKAS 23 (Revised) Borrowing Costs 1 HKFRS 8 Operating Segments 1 HK(IFRIC)-Int 11 HKFRS 2: Group and Treasury Share Transactions 2 HK(IFRIC)-Int 12 Service Concession Arranagements 3 HK(IFRIC)-Int 13 Customer Loyalty Programmes 4 HK(IFRIC)-Int 14 HKAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction 3 1 Effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after 1 March Effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after 1 July 2008 The directors of the Company anticipate that the application of these standards or interpretations will have no material impact on the results and the financial position of the Group. Note: This above list is complete as of 8 January The potential impact of any new or revised standards, amendments and interpretations released by the HKICPA after that date, but before the issue of the consolidated financial statements, should also be considered and disclosed. 75

88 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS HKAS HKAS 1.14 App 16.5 GR Significant accounting policies The consolidated financial statements have been prepared on the historical cost basis except for certain properties and financial instruments, which are measured at revalued amounts or fair values, as explained in the accounting policies set out below. The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority s interest in the subsidiary s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Business combinations The acquisition of businesses is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under HKFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group s interest in the net fair value of the acquiree s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured at the minority s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. 76

89 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Goodwill Goodwill arising on acquisitions prior to 1 January 2005 Goodwill arising on an acquisition of net assets and operations of another entity or a jointly controlled entity for which the agreement date is before 1 January 2005 represents the excess of the cost of acquisition over the Group s interest in the fair value of the identifiable assets and liabilities of the relevant acquiree at the date of acquisition. For previously capitalised goodwill arising on acquisitions of net assets and operations of another entity or a jointly controlled entity after 1 January 2001, the Group has discontinued amortisation from 1 January 2005 onwards, and such goodwill is tested for impairment annually, and whenever there is an indication that the cash generating unit to which the goodwill relates may be impaired (see the accounting policy below). Goodwill arising on acquisitions on or after 1 January 2005 Goodwill arising on an acquisition of a business or a jointly controlled entity (which is accounted for using proportionate consolidation) for which the agreement date is on or after 1 January 2005 represents the excess of the cost of acquisition over the Group s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the relevant business or jointly controlled entity at the date of acquisition. Such goodwill is carried at cost less any accumulated impairment losses. Capitalised goodwill arising on an acquisition of a business or a jointly controlled entity is presented separately in the consolidated balance sheet. For the purposes of impairment testing, goodwill arising from an acquisition is allocated to each of the relevant cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and whenever there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a financial year, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that financial year. When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the consolidated income statement. An impairment loss for goodwill is not reversed in subsequent periods. On subsequent disposal of the relevant cash-generating unit or a jointly controlled entity, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal. 77

90 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Investments in associates An associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group s share of the net assets of the associates, less any identified impairment loss. When the Group s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate. Any excess of the cost of acquisition over the Group s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group s interest in the relevant associate. HKAS Jointly controlled entities Joint venture arrangements that involve the establishment of a separate entity in which venturers have joint control over the economic activity of the entity are referred to as jointly controlled entities. The Group recognises its interests in jointly controlled entities using proportionate consolidation. The Group s share of each of the assets, liabilities, income and expenses of the jointly controlled entities are combined with the Group s similar line items, line by line, in the consolidated financial statements. Any goodwill arising on the acquisition of the Group s interest in a jointly controlled entity is accounted for in accordance with the Group s accounting policy for goodwill arising on the acquisition of a business or a jointly controlled entity (see above). Any excess of the Group s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. When a group entity transacts with a jointly controlled entity of the Group, profits or losses are eliminated to the extent of the Group s interest in the jointly controlled entity. 78

91 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets (disposal groups ) previous carrying amount and fair value less costs to sell. HKAS Sch 10:16(4) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold and services provided in the normal course of business, net of discounts and sales related taxes. Revenue from sale of goods is recognised when the goods are delivered and title has passed. Service income is recognised when services are provided. Revenue from construction contracts is recognised in accordance with the Group s accounting policy on construction contracts (see below). Interest income from a financial asset excluding financial assets at fair value through profit or loss is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount. Dividend income from investments excluding financial assets at fair value through profit or loss is recognised when the shareholders rights to receive payment have been established. Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement. Royalties determined on a time basis are recognised on a straight-line basis over the period of the agreement. Royalty arrangements that are based on production, sales and other measures are recognised by reference to the underlying arrangement. 79

92 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 16.73,, (c) Property, plant and equipment Property, plant and equipment including buildings held for use in the production or supply of goods or services, or for administrative purposes are stated at cost or fair value less subsequent depreciation and impairment losses. Buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the consolidated balance sheet at their revalued amounts, being the fair value at the date of revaluation less any subsequent accumulated depreciation and any subsequent accumulated impairment losses. Freehold land is stated at revalued amount, being the fair value at the date of revaluation less any subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any revaluation increase arising on revaluation of freehold land and buildings is credited to the properties revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case the increase is credited to the consolidated income statement to the extent of the decrease previously charged. A decrease in net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the properties revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to retained profits. Depreciation is provided to write off the cost or fair value of items of property, plant and equipment other than freehold land over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is derecognised. HKAS Investment properties Investment properties are properties held to earn rentals and/or for capital appreciation. On initial recognition, investment properties are measured at cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are measured at their fair values using the fair value model. Gains or losses arising from changes in the fair value of investment property are included in profit or loss for the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposals. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement in the year in which the item is derecognised. 80

93 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 11.39,(c) Construction contracts Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is shown as amounts due from customers for contract work. For contracts where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is shown as amounts due to customers for contract work. Amounts received before the related work is performed are included in the consolidated balance sheet, as a liability, as advances received. Amounts billed for work performed but not yet paid by the customer are included in the consolidated balance sheet under trade and other receivables. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessor Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group s net investment outstanding in respect of the leases. Rental income from operating leases is recognised in the consolidated income statement on a straight-line basis over the term of the relevant lease. The Group as lessee Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group s general policy on borrowing costs (see below). Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straightline basis. Leasehold land Interest in leasehold land is accounted for as operating leases and amortised over the lease term on a straight-line basis. 81

94 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Sch 10:12(14) Foreign currencies In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Company s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financial statements. Exchange differences arising on the retranslation of nonmonetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity. For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group s foreign operations are translated into the presentation currency of the Group (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the translation reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of. Goodwill and fair value adjustments on identifiable assets acquired arising on an acquisition of a foreign operation on or after 1 January 2005 are treated as assets and liabilities of that foreign operation and translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising are recognised in the translation reserve. Goodwill and fair value adjustments on identifiable assets acquired arising on an acquisition of a foreign operation before 1 January 2005 is treated as non-monetary foreign currency items of the acquirer and reported using historical cost prevailing at the date of acquisition. HKAS Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, are capitalised as part of the cost of those assets. Capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. To the extent that fixed-rated bank borrowings are used to finance a qualifying asset and are hedged in an effective fair value hedge of interest rate risk, the capitalised borrowing costs reflected the hedged interest rate. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. HKAS Government grants Government grants are recognised as income over the periods necessary to match them with the related costs. Grants related to depreciable assets are presented as deferred income and are released to income over the useful lives of the assets. Grants related to expense items are recognised in the same period as those expenses are charged in the consolidated income statement and are deducted in reporting the related expense. 82

95 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS A Retirement benefit costs Payments to defined contribution retirement benefit plans are charged as an expense when employees have rendered service entitling them to the contributions. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses which exceed 10 per cent of the greater of the present value of the Group s pension obligations and the fair value of plan assets are amortised over the expected average remaining working lives of the participating employees. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the amended benefits become vested. The amount recognised in the consolidated balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised actuarial gains and losses and unrecognised past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Sch 10:12(15) Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 83

96 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Intangible assets Intangible assets acquired separately HKAS Intangible assets acquired separately and with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives. Alternatively, intangible assets with indefinite useful lives are carried at cost less any subsequent accumulated impairment losses (see the accounting policy in respect of impairment losses on tangible and intangible assets below). Gains or losses arising from derecognition of an intangible asset are measured at the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised. Research and development expenditures Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development expenditure is recognised only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortised on a straight-line basis over its useful life, and carried at cost less subsequent accumulated amortisation and any accumulated impairment losses. The amount initially recognised for internally-generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria. Where no internally-generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred. HKAS Subsequent to initial recognition, internally-generated intangible asset is reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately. Intangible assets acquired in a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. HKAS Subsequent to initial recognition, intangible assets with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives. Alternatively, intangible assets with indefinite useful lives are carried at cost less any subsequent accumulated impairment losses (see the accounting policy in respect of impairment losses on tangible and intangible assets below). Impairment of tangible and intangible assets other than goodwill (see the accounting policy in respect of goodwill above) At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. In addition, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount under another standard, in which case the impairment loss is treated as revaluation decrease under that standard. 84

97 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount under another standard, in which case the reversal of the impairment loss is treated as revaluation increase under that standard. HKAS 2.36 Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the first-in, first-out method. HKFRS 7.21 Financial instruments Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. HKFRS 7.B5(c),(g) HKFRS 7.28 Financial assets The Group s financial assets are classified into one of the four categories, including financial assets at fair value through profit or loss ( FVTPL ), loans and receivables, held-to-maturity investments and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as at FVTPL, of which interest income is included in net gains or losses. HKFRS 7.B5 Financial assets at fair value through profit or loss Financial assets at FVTPL has two subcategories, including financial assets held for trading and those designated as at FVTPL on initial recognition. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling in the near future; or it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. 85

98 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 39.9(i) HKAS 39.9(ii) HKAS 39.11A HKAS A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or it forms part of a contract containing one or more embedded derivatives, and HKAS 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL. HKFRS 7.B5(e) At each balance sheet date subsequent to initial recognition, financial assets at FVTPL are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss includes any dividend or interest earned on the financial assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade receivables, loan receivables, other receivables, pledged bank deposits, bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy in respect of impairment loss on financial assets below). Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group s management has the positive intention and ability to hold to maturity. The Group designated certain debt securities as held-to-maturity investments. At each balance sheet date subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy in respect of impairment loss on financial assets below). HKFRS 7.B5 Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated or not classified as financial assets at FVTPL, loans and receivables or held-to-maturity investments. The Group designated listed equity and debt securities as well as unlisted equity securities as available-forsales financial assets. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in equity, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognised in profit or loss (see accounting policy in respect of impairment loss on financial assets below). For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, they are measured at cost less any identified impairment losses at each balance sheet date subsequent to initial recognition (see accounting policy in respect of impairment loss on financial assets below). 86

99 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 7.B5(f) Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been impacted. For an available-for sale equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment. For all other financial assets, objective evidence of impairment could include: significant financial difficulty of the issuer or counterparty; or default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation. For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 60 days, observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. HKFRS 7.B5(d) The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss. For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Impairment losses on available-for-sale equity investments will not be reversed in profit or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in equity. For available-for-sale debt investments, impairment losses are subsequently reversed if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. 87

100 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Financial liabilities and equity Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The Group s financial liabilities are generally classified into financial liabilities at FVTPL and other financial liabilities. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Interest expense is recognised on an effective interest basis other than those financial liabilities designated as at FVTPL, of which the interest expense is included in net gains or losses. Financial liabilities at fair value through profit or loss Financial liabilities at FVTPL has two subcategories, including financial liabilities held for trading and those designated as at FVTPL on initial recognition. A financial liability is classified as held for trading if: it has been incurred principally for the purpose of repurchasing in the near future; or it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. HKAS 39.9(i) HKAS 39.9(ii) HKAS 39.11A HKAS A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or it forms part of a contract containing one or more embedded derivatives, and HKAS 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL. At each balance sheet date subsequent to initial recognition, financial liabilities at FVTPL are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss includes any interest paid on the financial liability. Other financial liabilities Other financial liabilities (including bank and other borrowings, trade payables and other payables) are subsequently measured at amortised cost, using the effective interest method. 88

101 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Convertible loan notes Convertible loan notes issued by the Company that contain both the liability and conversion option components are classified separately into respective items on initial recognition. Conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company s own equity instruments is an equity instrument. On initial recognition, the fair value of the liability component is determined using the prevailing market interest rate of similar non-convertible debts. The difference between the gross proceeds of the issue of the convertible loan notes and the fair value assigned to the liability component, representing the conversion option for the holder to convert the loan notes into equity, is included in equity (convertible loan notes equity reserve). In subsequent periods, the liability component of the convertible loan notes is carried at amortised cost using the effective interest method. The equity component, representing the option to convert the liability component into ordinary shares of the Company, will remain in convertible loan notes equity reserve until the conversion option is exercised (in which case the balance stated in convertible loan notes equity reserve will be transferred to share premium). Where the option remains unexercised at the expiry date, the balance stated in convertible loan notes equity reserve will be released to retained profits. No gain or loss is recognised in profit or loss upon conversion or expiration of the option. Transaction costs that relate to the issue of the convertible loan notes are allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are charged directly to equity. Transaction costs relating to the liability component are included in the carrying amount of the liability component and amortised over the period of the convertible loan notes using the effective interest method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Repurchase of the Company s own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company s own equity instruments. Derivative financial instruments and hedging Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Embedded derivatives Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. 89

102 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Hedge accounting The Group designates certain derivatives as either hedges of the fair value of fixed-rate bank borrowings (fair value hedges), hedges of highly probable forecast transactions for foreign currency exposure (cash flow hedges), or hedges of net investments in foreign operations. At the inception of the hedge relationship the entity documents the relationship between the hedging instrument and hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk. The adjustment to the carrying amount of the hedged item for which the effective interest is used is amortised to profit or loss as soon as an adjustment exists. The adjustment is based on a recalculated effective interest rate at the date the amortisation begins. Hedge accounting is discontinued when the Group revokes the hedge relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss as other gains or losses. Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. Hedge accounting is discontinued when the Group revokes the hedge relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. Hedges of net investments in foreign operations Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity in the translation reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss as other gains or losses. Gains and losses deferred in the translation reserve are recognised in profit or loss on disposal of the foreign operation. 90

103 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. A financial guarantee contract issued by the Group and not designated as at fair value through profit or loss is recognised initially at its fair value less transaction costs that are directly attributable to the issue of the financial guarantee contract. Subsequent to initial recognition, the Group measures the financial guarantee contact at the higher of: (i) the amount determined in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18 Revenue. Derecognition Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. Contingent liabilities acquired in a business combination Contingent liabilities acquired in a business combination are initially measured at fair value at the date of acquisition. At subsequent balance sheet date, such contingent liabilities are measured at the higher of the amount that would be recognised in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation (if appropriate). 91

104 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued LR GR Share-based payment transactions Equity-settled share-based payment transactions Share options granted to employees For grants of share options which are conditional upon satisfying specified vesting conditions, the fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share options reserve). The impact of the revision of the original estimates during the vesting period, if any, is recognised in profit or loss with a corresponding adjustment to share options reserve. For share options which are vested at the date of grant, the fair value of the share options granted is expensed immediately to profit or loss. At the time when the share options are exercised, the amount previously recognised in share options reserve will be transferred to share premium. When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in share options reserve will be transferred to retained profits. Share options granted to suppliers For share options granted to suppliers in exchange for goods or services, they are measured at the fair value of the goods or services received. The fair values of the goods or services are recognised as expenses immediately, unless the goods or services qualify for recognition as assets. Corresponding adjustments have been made to equity (share options reserve). Cash-settled share-based payment transactions For cash-settled share-based payments, the Group measures the goods or services acquired and the liability incurred at the fair value of the liability. At each balance sheet date, the liability is remeasured at its fair value until the liability is settled, with any changes in fair value recognised in profit or loss. 92

105 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 4. Critical accounting judgments and key sources of estimation uncertainty Note: The following are examples of the types of disclosures that might be required in this area. The matters disclosed will be dictated by the circumstances of the individual entity, and by the significance of judgements and estimates made to the results and financial position of the entity. In the application of the Group s accounting policies, which are described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. HKAS Critical judgements in applying accounting policies The following are the critical judgements, apart from those involving estimations (see below), that management has made in the process of applying the Group s accounting policies and that have the most significant effect on the amounts recognised in consolidated financial statements. Revenue recognition Note 13 describes the expenditure required in the year for rectification work carried out on goods supplied to one of the Group s major customers. These goods were delivered to the customer in the months of January to July 2007, and shortly thereafter the defects were identified by the customer. Following negotiations, a schedule of works was agreed, which will involve expenditure by the Group until In the light of the problems identified, management was required to consider whether it was appropriate to recognise the revenue from these transactions of HK$39 million in the current year, in line with the Group s general policy of recognising revenue when goods are delivered, or whether it was more appropriate to defer recognition until the rectification work was complete. In making its judgement, management considered the detailed criteria for the recognition of revenue from the sale of goods set out in HKAS 18 Revenue and, in particular, whether the Group had transferred to the buyer the significant risks and rewards of ownership of the goods. Following the detailed quantification of the Group s liability in respect of rectification work, and the agreed limitation on the customer s ability to require further work or to require replacement of the goods, the directors are satisfied that the significant risks and rewards have been transferred and that recognition of the revenue in the current year is appropriate, in conjunction with recognition of an appropriate provision for the rectification costs. 93

106 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS HKAS Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cashgenerating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the balance sheet date was HK$20.3 million after an impairment loss of HK$15,000 (2006: nil) was recognised during Details of the impairment loss calculation are provided in note 22. Fair value of derivatives and other financial instruments As described in notes 27 and 30, the directors use their judgement in selecting an appropriate valuation technique for financial instruments not quoted in an active market. Valuation techniques commonly used by market practitioners are applied. The Group's unlisted equity instruments with carrying amount of HK$2.74 million (2006: HK$2.7 million) are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market prices or rates. The estimation of fair value of these equity instruments also includes some assumptions not supported by observable market prices or rates. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for specific features of the instrument. The carrying amounts of these derivatives financial assets and derivative financial liabilities are HK$528,000 and HK$98,000 (2006: HK$397,000 and nil) respectively. 94

107 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 5. Revenue HKAS Sch 10:16(4) An analysis of the Group s revenue for the year, for both continuing and discontinued operations, is as follows: HK$ 000 HK$ 000 Continuing operations HKAS HKAS Revenue from sales of goods 140, ,035 Revenue from rendering of services , ,840 Discontinued operations HKAS HKAS Revenue from sales of goods 64,087 77,661 Construction contract revenue ,405 77,843 Sch 10:16(2) 205, ,683 95

108 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued App 16.7 GR HKAS HKAS Business and geographical segments Business segments For management purposes, the Group is currently organised into four operating divisions widgets, bicycles, construction and toys. These divisions are the basis on which the Group reports its primary segment information. Principal activities are as follows: Widgets Toys Bicycles Construction the manufacture and sale of widgets. the manufacture and sale of toys. the manufacture of bicycles including leisure bicycles, mountain bicycles and children s bicycles. the construction and renovation of residential properties. Other operations include the development and sale of computer software for specialised business applications, and the leasing out of specialised storage equipment. During the financial year, the Group disposed of its bicycle business and the Board of Directors announced a plan to dispose of the construction business (see note 11). Segment information about these businesses is presented below. 96

109 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 2007 Continuing operations Discontinued operations Widgets Toys Other Eliminations Total Bicycles Construction Total Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS HKAS HKAS HKAS HKAS REVENUE External sales 75,949 63,455 1, ,918 35,515 28,890 64, ,323 Inter-segment sales 2, (3,321) Total 78,464 64,261 1,514 (3,321) 140,918 35,515 28,890 64, ,323 Inter-segment sales are charged at prevailing market rates. RESULT Segment result 29,123 8,774 1,011-38,908 5,454 4,206 9,660 48,568 Unallocated income 4,542 1,960 6,502 Unallocated corporate expenses (15,088) (150) (15,238) Share of profits of associates 1,186-1,186 Profit before tax 29,548 11,470 41,018 Income tax expense (11,306) (3,160) (14,466) HKAS HKAS HKAS HKAS HKAS HKAS Profit for the year 18,242 8,310 26,552 BALANCE SHEET Widgets Bicycles Construction Toys Other Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 ASSETS Segment assets 98,750-20,901 72,513 8, ,510 Interests in associates 8,425 Unallocated corporate assets 53,523 Consolidated total assets 262,458 LIABILITIES Segment liabilities 10,003-3,254 7, ,612 Unallocated corporate liabilities 70,806 Consolidated total liabilities 91,418 OTHER INFORMATION Continuing operations Discontinued operation Widgets Toys Other Total Bicycles Construction Total Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS HKAS HKAS HKAS HKAS HKAS Capital additions 13,287 7, ,039-4,099 4,099 25,138 Depreciation and amortisation 7,275 5,137-12, ,290 1,767 14,179 Impairment losses on property, plant and equipment 1, , ,204 Impairment losses on goodwill Impairment losses on receivables Write-down of inventories

110 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 2006 Continuing operations Discontinued operations Widgets Toys Other Eliminations Total Bicycles Construction Total Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS HKAS HKAS HKAS HKAS REVENUE External sales 79,895 69,542 2, ,840 49,153 28,690 77, ,683 Inter-segment sales 1, (2,522) Total 81,767 70,192 2,403 (2,522) 151,840 49,153 28,690 77, ,683 Inter-segment sales are charged at prevailing market rates. RESULT Segment result 29,640 10, ,967 9,636 3,491 13,127 54,094 Unallocated income 3,356-3,356 Unallocated corporate expenses (13,774) (134) (13,908) Share of profits of associates 1,589-1,589 Profit before tax 32,138 12,993 45,131 Income tax expense (11,801) (2,998) (14,799) HKAS Profit for the year 20,337 9,995 30,332 BALANCE SHEET HKAS HKAS HKAS HKAS HKAS Widgets Bicycles Construction Toys Other Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 ASSETS Segment assets 98,034 10,012 20,012 70,658 7, ,686 Interests in associates 7,269 Unallocated corporate assets 47,174 Consolidated total assets 261,129 LIABILITIES Segment liabilities 11, ,552 6, ,488 Unallocated corporate liabilities 72,602 Consolidated total liabilities 94,090 OTHER INFORMATION Continuing operations Discontinued operation Widgets Toys Other Total Bicycles Construction Total Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS HKAS HKAS HKAS HKAS HKAS Capital additions 6,952 3,483-10, ,500 1,825 12,260 Depreciation and amortisation 7,587 6,291-13, ,736 3,472 17,350 Impairment losses on property, plant and equipment Impairment losses on goodwill Impairment losses on receivables Write-down of inventories

111 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS Geographical segments The Group s four divisions operate in three principal geographical areas the Peoples Republic of China (excluding Hong Kong) (the PRC ), Hong Kong and Malaysia. The following table provides an analysis of the Group s sales by geographical markets, irrespective of the origin of the goods and services: HKAS Revenue from external customers HK$ 000 HK$ 000 PRC 136, ,814 Hong Kong 35,898 43,562 Malaysia 25,485 25,687 European countries 7,333 8, , ,683 Revenue from the Group s discontinued operations was derived mainly from the PRC and Hong Kong. HKAS 14.69,(c) The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and intangible assets, analysed by the geographical area in which the assets are located: Additions to property, Carrying amount of plant and equipment segment assets and intangible assets HK$ 000 HK$ 000 HK$ 000 HK$ 000 PRC 139, ,799 12,598 6,748 Hong Kong 39,256 36,428 8,643 2,888 Malaysia 21,684 22,009 3,897 2,624 European countries , ,686 25,138 12,260 99

112 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 7. Investment and other income Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS 18.35(iii) Interest income on: Bank deposits 1, , Available-for-sale investments Other loans and receivables Held-to-maturity investments Total Interest income 2,315 1, ,315 1,304 HKAS 18.35(iv) HKAS 18.35(v) HKAS Royalties Dividends from equity securities Government grant received for staff re-training Other ,339 3, ,339 3,330 Sch 10:13(1)(g) Included above is income from listed investments of HK$471,000 (2006: HK$444,000) and from unlisted investments of HK$284,000 (2006: HK$268,000). Investment and other income analysed by category of asset is as follows: Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Available-for-sale financial assets Loans and receivables (including cash and bank balances) 1, , Held-to-maturity investments Non-financial assets 1,868 1, ,868 1,872 4,339 3, ,339 3,330 Revenue recognised in respect of financial assets designated as at fair value through profit or loss is disclosed in note

113 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 8. Other gains and losses Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS HKAS 1.87(d) HKAS HKFRS 7.20 HKFRS 7.20 HKFRS 7.20 HKFRS 7.20 HKAS 40.76(d) HKFRS 7.20 HKFRS 7.24 HKFRS 7.24(c) Gain on disposal of property, plant and equipment Gain/(loss) on disposal of investments Net foreign exchange gains/(loss) 114 (117) (68) Change in fair value of financial assets designated as at FVTPL Change in fair value of financial assets classified as held for trading Change in fair value of financial liabilities designated as at FVTPL Change in fair value of financial liabilities classified as held for trading Change in fair value of investment property (6) (6) 8 Recycling of gain/(loss) from equity on disposal of available-for-sale investments Hedge ineffectiveness on cash flow hedges Hedge ineffectiveness on net investment hedges

114 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 9. Finance costs Sch 10:13(1) HKFRS 7.20 HKAS App 16.22(2) GR HKFRS 7.24(i) HKFRS 7.24(ii) Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Interest on: Bank and other borrowings - wholly repayable within five years 4,171 5, ,321 5,359 - not wholly repayable within five years Finance leases Effective interest expense on convertible loan notes Unwinding of discounts on provisions Imputed interest expense on non-current interest-free loan from the immediate holding company Total borrowing costs 5,045 6, ,195 6,184 Less: amounts capitalised (11) (27) - - (11) (27) 5,034 6, ,184 6,157 Increase in fair value of interest rate swaps (35) (27) - - (35) (27) Decrease in fair value of fixed-rate borrowings attributable to hedged risk ,034 6, ,184 6,157 HKAS 23.29(c) Borrowing costs capitalised during the year arose on the general borrowing pool and are calculated by applying a capitalisation rate of 8% per annum (2006: 7.8% per annum) to expenditure on qualifying assets. 102

115 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 10. Income tax expense HKAS Sch 10:13(1)(c) Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Current tax: Hong Kong 1, ,884 1,728 PRC Enterprise Income Tax 8,523 7,926 2,796 2,258 11,319 10,184 Other jurisdictions (Over) under provision of current tax in prior years: 10,081 8,979 3,156 2,988 13,237 11,967 Hong Kong (300) (300) - PRC Enterprise Income Tax - 2, ,380 (300) 2, (300) 2,380 Deferred tax (note 29): Current year 2, , Attributable to a change in tax rate (482) (482) - 1, , ,306 11,801 3,160 2,998 14,466 14,799 HKAS 12.81(c) Sch 10:17(3) Hong Kong Profits Tax is calculated at 17.5% (2006: 17.5%) of the estimated assessable profit for the year. PRC subsidiaries are subject to PRC Enterprise Income Tax at 30% (2006: 30%). Taxation arising in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. On 16 March 2007, the People s Republic of China promulgated the Law of the People s Republic of China on Enterprise Income Tax (the New Law ) by Order No. 63 of the President of the People s Republic of China. On 6 December 2007, the State Council issued Implementation Regulations of the New Law. The New Law and Implementation Regulations will change the tax rate from 30% to 25% for certain subsidiaries from 1 January The deferred tax balance has been adjusted to reflect the tax rates that are expected to apply to the respective periods when the asset is realised or the liability is settled. 103

116 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 12.81(c) The tax charge for the year can be reconciled to the profit per the consolidated income statement as follows: HK$ 000 HK$ 000 Profit before tax: Continuing operations 29,548 32,138 Discontinued operations 11,470 12,993 41,018 45,131 Tax at PRC Enterprise Income Tax rate of 30% (2006: 30%) 12,305 13,539 Tax effect of share of profits of associates (356) (477) Tax effect of expenses not deductible for tax purpose 4,443 1,260 Tax effect of income not taxable for tax purpose (404) (1,063) (Over) under provision in respect of prior years (300) 2,380 Tax effect of [tax losses/deductible temporary differences] not recognised - - Utilisation of [tax losses/deductible temporary differences] previously not recognised - - Effect of different tax rates of group entities operating in jurisdictions other than PRC (740) (840) Decrease in opening deferred tax liability resulting from a decrease in applicable tax rate (482) - Tax charge for the year 14,466 14,

117 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 11. Discontinued operations Disposal of the bicycle business HKFRS 5.30 HKFRS 5.41 On 28 September 2007, the Board of Directors entered into a sale agreement to dispose of the Group s bicycle business. The proceeds of sale substantially exceeded the carrying amount of the related net assets and, accordingly, no impairment losses were recognised on the reclassification of these operations as held for sale. The disposal of the bicycle business is consistent with the Group s long-term policy to focus its activities in the widget and toy manufacturing industries. The disposal was completed on 30 November 2007, on which date control of the bicycle business passed to the acquirer. Details of the assets and liabilities disposed of are disclosed in note 48. Plan to dispose of the construction business HKFRS 5.30 HKFRS 5.41 HKFRS 5.34 On 30 November 2007, the Board of Directors announced a plan to dispose of the Group s construction business, which involves the construction and renovation of residential properties in Hong Kong. The disposal is consistent with the Group s long-term policy to focus its activities in the widget and toy manufacturing industries. The Group is actively seeking a buyer for its construction business and expects to complete the sale by 31 July On initial reclassification of these operations as held for sale, the Group has not recognised any impairment losses. The combined results and cash flows of the discontinued operations (i.e. the bicycle and construction businesses) included in the consolidated income statement and the consolidated cash flow statement are set out below. 105

118 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HK$ 000 HK$ 000 HKFRS 5.33 HKFRS 5.34 HKAS 12.81(h) HKFRS 5.33(iv) Profit for the year from discontinued operations Revenue 64,405 77,843 Expenses (54,875) (64,850) Profit before tax 9,530 12,993 Income tax expense (2,524) (2,998) 7,006 9,995 HKFRS 5.33(iii) HKAS 12.81(h) HKFRS 5.33(iv) Loss on remeasurement to fair value less costs to sell - - Gain on disposal of operations (including HK$0.12 million reversal of translation reserve on disposal of a subsidiary) 1,940 - Income tax expense (636) - 1,304 - Profit for the year from discontinued operations 8,310 9,995 HKFRS 5.33(c) Cash flows from discontinued operations Net cash flows from operating activities 6,381 7,078 Net cash flows from investing activities 2,767 - Net cash flows from financing activities (5,000) - Net cash flows 4,148 7,078 The construction business has been classified and accounted for at 31 December 2007 as a disposal group held for sale (see note 12). 106

119 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 12. Non-current assets held for sale HK$ 000 HK$ 000 Freehold land held for sale (Note 1) 1,260 - Assets related to the construction business (Note 2) 21,076-22,336 - Liabilities associated with assets held for sale (Note 2) 3,684 - Notes: HKFRS 5.41 HKFRS 5.41 HKFRS ) The Group intends to dispose of a parcel of freehold land it no longer utilises in the next 10 months. The property located on the freehold land was previously used in the Group s toy operations and has been fully depreciated. A search is underway for a buyer. No impairment loss was recognised on reclassification of the freehold land as held for sale as at 31 December ) As described in note 11, the Group is seeking to dispose of its construction business and anticipates that the disposal will be completed by 31 July The major classes of assets and liabilities comprising the operations classified as held for sale at the balance sheet date are as follows: HK$ 000 HK$ 000 HKAS 2.36(c) Goodwill 1,147 - Property, plant and equipment 16,944 - Inventories Trade and other receivables 1,980 - Bank balances and cash Assets of construction business classified as held for sale 21,076 - Trade and other payables (3,254) - Current tax liabilities - - Deferred tax liabilities (430) - Liabilities of construction business associated with assets classified as held for sale (3,684) - Net assets of construction business classified as held for sale 17,

120 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 13. Profit for the year Profit for the year has been arrived at after charging (crediting): Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Depreciation for property, plant and equipment 10,820 12,322 1,767 3,472 12,587 15,794 HKAS (d) Sch 10:13(1) Amortisation of other intangible assets (included in [depreciation and amortisation expense/ administration expenses]) 1,592 1, ,592 1,556 Total depreciation and amortisation 12,412 13,878 1,767 3,472 14,179 17,350 Impairment loss recognised in respect of property, plant and equipment (included in other expenses) 1, ,204 - Impairment loss recognised in respect of goodwill (included in other expenses) Sch 10:15 HKAS HKAS 40.75(f) Auditor s remuneration 2,000 1, ,150 1,980 Research and development costs Gross rental income from investment properties (20) (16) - - (20) (16) Less: Direct operating expenses from investment properties that generated rental income during the year Direct operating expenses from investment properties that did not generate rental income during the year (18) (14) - - (18) (14) 108

121 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Profit for the year has been arrived at after charging (crediting): Continuing Discontinued operations operations Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKFRS 7.20(e) Impairment losses on financial assets - trade receivables available-for-sale equity investments available-for-sale debt investments held-to-maturity financial assets loans carried at amortised cost HKAS 1.93 HKAS HKAS A(g) Employee benefits expense: Post employment benefits Defined contribution plans Defined benefit plans HKFRS 2.50 HKFRS 2.51 HKFRS 2.51 Share-based payments Equity-settled share-based payments Cash-settled share-based payments HKAS Termination benefits Other employee benefits 8,865 10,183 4,561 3,756 13,426 13,939 9,803 11,697 4,575 3,784 14,378 15,481 HKAS 2.36(d) Cost of inventories recognised as an expense 86,780 90,100 34,118 43, , ,220 HKAS 1.86 Costs of HK$4.17 million (2006: nil) have been recognised during the year in respect of rectification work to be carried out on goods supplied to one of the Group s major customers, which have been included in [cost of sales/cost of inventories and employee benefits expense]. The amount represents the estimated cost of work to be carried out in accordance with an agreed schedule of works up to HK$1.112 million of the provision has been utilised in the current year, with a provision of HK$3.058 million carried forward to meet anticipated expenditure in 2008 and 2009 (see note 41). 109

122 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued s161 s161a App GR Directors emoluments The emoluments paid or payable to each of the six (2006: six) directors were as follows: Gary Daniel Derek Tiara Florence John Total D.K. Wong D.D. Lee S.Y. Wong Cheung K.Y. Tang Banks 2007 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Fees Other emoluments Salaries and other benefits ,000 Contributions to retirement benefits schemes Share-based payments Discretionary and performance related incentive payments (Note) Total emoluments ,647 Gary Daniel Derek Tiara Florence John Total D.K. Wong D.D. Lee S.Y. Wong Cheung K.Y. Tang Banks 2006 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Fees Other emoluments: Salaries and other benefits Contributions to retirement benefits schemes Share-based payments Discretionary and performance related incentive payments (Note) Total emoluments ,580 Note: The performance related incentive payment is determined by reference to the individual performance of the directors and approved by the Remuneration Committee. 110

123 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued App GR Employees emoluments Of the five individuals with the highest emoluments in the Group, three (2006: three) were directors of the Company whose emoluments are included in the disclosures in note 14 above. The emoluments of the remaining two (2006: two) individuals were as follows: HK$ 000 HK$ 000 Salaries and other benefits Contributions to retirement benefits schemes 5 10 Share-based payment expense Discretionary and performance related incentive payments - - Their emoluments were all within HK$1,000, HKAS 1.95 Sch 10:13(1)(j) 16. Dividends HK$ 000 HK$ 000 Dividends recognised as distributions during the year: Interim, paid - HK10.00 cents per share (2006: nil) 2,300 - Final, paid - HK18.84 cents per share (2006: HK28.16 cents) 4,335 6,479 6,635 6,479 HKAS HKAS Subsequent to the balance sheet date, the final dividend of HK26.31 cents (2006: HK18.84 cents) per share has been proposed by the directors and is subject to approval by the shareholders in the forthcoming general meeting. 111

124 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS Earnings per share Note: HKAS 33 Earnings per Share, requires that earnings per share (EPS) information be presented by entities whose ordinary shares or potential ordinary shares are publicly traded, or by entities that are in the process of issuing ordinary shares or potential ordinary shares in public securities markets. If other entities choose to disclose EPS information voluntarily in financial statements that comply with HKFRSs, such disclosures should comply fully with the requirements of HKAS 33. From continuing and discontinued operations The calculation of the basic and diluted earnings per share attributable to the ordinary equity holders of the Company is based on the following data: HK$ 000 HK$ 000 HKAS Earnings Earnings for the purpose of basic earnings per share (profit for the year attributable to equity holders of the Company) 22,552 27,569 Effect of dilutive potential ordinary shares: Interest on convertible loan notes (net of tax) 77 - Adjustment to the share of profit of a subsidiary based on dilution of its earnings per share (66) (56) Earnings for the purpose of diluted earnings per share 22,563 27,513 HKAS Number of shares Weighted average number of ordinary shares for the purpose of basic earnings per share 22,450 23,005 Effect of dilutive potential ordinary shares: Share options issued by the Company Convertible loan notes 1,203 - Weighted average number of ordinary shares for the purpose of diluted earnings per share 23,846 23,

125 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued From continuing operations The calculation of the basic and diluted earnings per share from continuing operations attributable to the ordinary equity holders of the Company is based on the following data: HKAS Earnings figures are calculated as follows: HK$ 000 HK$ 000 Profit for the year attributable to equity holders of the Company 22,552 27,569 Less: Profit for the year from discontinued operations (8,310) (9,995) Earnings for the purpose of basic earnings per share from continuing operations 14,242 17,574 Effect of dilutive potential ordinary shares: Interest on convertible loan notes (net of tax) 77 - Adjustment to the share of profit of a subsidiary based on dilution of its earnings per share (66) (56) Earnings for the purpose of diluted earnings per share from continuing operations 14,253 17,518 HKAS HKAS The denominators used are the same as those detailed above for both basic and diluted earnings per share. From discontinued operations Basic earnings per share for the discontinued operations is HK37.0 cents per share (2006: HK43.4 cents per share) and diluted earnings per share for the discontinued operations is HK34.9 cents per share (2006: HK43.3 cents per share), based on the profit for the year from the discontinued operations of HK$8.310 million (2006: HK$9.995 million) and the denominators detailed above for both basic and diluted earnings per share. 113

126 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 18. Property, plant and equipment Freehold Leasehold Plant and land Buildings improvements equipment Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS 16.73(d)(e) HKAS Sch 10:12(8) COST OR VALUATION At 1 January ,750 10, , ,886 Exchange adjustments Additions - 1,205-10,697 11,902 Surplus on revaluation 1, ,643 Disposals (27,286) (27,286) At 31 December ,358 11, , ,147 Exchange adjustments Additions - 1,000-23,243 24,243 Acquired on acquisition of subsidiaries Surplus on revaluation Reclassified as held for sale (1,260) (1,357) - (22,045) (24,662) Disposals (1,530) (1,184) (16) (19,771) (22,501) HKAS At 31 December ,568 10, , ,681 Comprising At cost , ,746 At valuation ,568 10, ,935 13,568 10, , ,681 DEPRECIATION AND IMPAIRMENT At 1 January (1,521) (30) (25,397) (26,948) Exchange adjustments - (2) - - (2) Provided for the year - (892) (55) (14,847) (15,794) Eliminated on revaluation Eliminated on disposals ,058 5,058 At 31 December (2,415) (85) (35,186) (37,686) HKAS Exchange adjustments Provided for the year - (721) (53) (11,813) (12,587) Impairment loss recognised (1,204) (1,204) Reclassified as held for sale ,305 6,458 Eliminated on disposals ,467 6,573 At 31 December (2,881) (134) (35,431) (38,446) CARRYING AMOUNTS At 31 December ,568 7, , ,235 At 31 December ,358 9, , ,

127 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 16.73(c) The above items of property, plant and equipment are depreciated on a straight-line basis at the following rates per annum: Buildings Over the shorter of the term of the lease, or years Leasehold improvements 15-20% Plant and equipment 7-20% HKAS to (g) HKAS HKAS During the year, the Group carried out a review of the recoverable amount of its manufacturing plant and equipment, having regard to its ongoing programme of modernisation and the introduction of new product lines. These assets are used in the Group s widgets segment. The review led to the recognition of an impairment loss of HK$1.09 million (2006: nil), that has been recognised in profit or loss. The recoverable amount of the relevant assets has been determined on the basis of their value in use. The discount rate used in measuring value in use was 9% per annum. The discount rate used when the recoverable amount of these assets was previously estimated in 2006 was 8% per annum. Additional impairment losses recognised in respect of property, plant and equipment in the year amounted to HK$0.114 million. These losses are attributable to greater than anticipated wear and tear. The impairment losses have been included in the line item [cost of sales/other expenses] in the consolidated income statement. Freehold land and buildings carried at revalued amounts HKAS to (d) HKAS 16.77(e) An independent valuation of the Group s land and buildings was performed by Messrs. R & P Trent to determine the fair value of the freehold land and buildings. The fair values estimated by the valuer on 31 December 2007 do not differ significantly from their carrying amounts and no revaluation adjustment has been recognised in the current year. The valuation, which conforms to International Valuation Standards, was determined by reference to discounted cash flows using a discount rate of 10%. The effective date of the valuation is 31 December 2007 (2006: 31 December 2006). Had the Group s freehold land and buildings (other than freehold land and buildings classified as held for sale or included in a disposal group) been measured on a historical cost basis, their carrying amount would have been as follows: HK$ 000 HK$ 000 Freehold land 11,710 14,500 Buildings 6,455 9,460 HKAS HKAS Sch 10:12(4) The carrying amount of plant and equipment includes an amount of HK$18,000 (2006: HK$36,000) in respect of assets held under finance leases. The Group has pledged freehold land and buildings having a carrying amount of approximately HK$21 million (2006: HK$26 million) to secure general banking facilities granted to the Group. 115

128 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Sch 10:12(9) 19. Prepaid lease payments HK$ 000 HK$ 000 The Group s prepaid lease payments comprise: Land in Hong Kong: Long lease - - Medium term lease 1,700 1,750 Short lease - - Land outside Hong Kong: Long lease - - Medium term lease 1,300 1,350 Short lease - - Analysed for reporting purposes as: 3,000 3,100 Current assets (included in trade and other receivables) Non-current assets 2,900 3,000 3,000 3,

129 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 20. Investment properties HKAS HK$ 000 FAIR VALUE At 1 January Exchange adjustments - Additions 12 Net increase in fair value 8 At 31 December Exchange adjustments - Additions 10 Net decrease in fair value (6) At 31 December HKAS 40.75(d),(e) HKAS HKAS 40.75(g) Sch 10:12(4) Sch 10:12(9) The fair value of the Group s investment properties at 31 December 2007 and 2006 have been arrived at on the basis of a valuation carried out on that date by Messrs. Lo & Ko, independent qualified professional valuers not connected with the Group. Messrs. Lo & Ko are members of the Hong Kong Institute of Valuers, and have appropriate qualifications and recent experiences in the valuation of similar properties in the relevant locations. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties. All of the Group s property interests held under operating leases to earn rentals purposes are measured using the fair value model and are classified and accounted for as investment properties. All of the Group s investment properties have been pledged to secure general banking facilities granted to the Group. The carrying amount of investment properties shown above comprises: HK$ 000 HK$ 000 Land in Hong Kong: Long lease - - Medium-term lease Land outside Hong Kong: Long lease - - Medium-term lease - - Short lease

130 Hong Kong GAAP Limited HKFRS 3.74 HKFRS 3.75 Notes to the consolidated financial statements for the year ended 31 December continued 21. Goodwill HK$ 000 COST At 1 January ,060 Exchange adjustments - Acquired on acquisition of a subsidiary - Eliminated on disposal of a subsidiary - At 31 December ,060 Exchange adjustments - Acquired on acquisition of subsidiaries 435 Eliminated on disposal of a subsidiary (3,080) Reclassified as held for sale (1,147) At 31 December ,268 IMPAIRMENT At 1 January Impairment loss recognised - At 31 December Impairment loss recognised (15) Reclassified as held for sale - At 31 December 2007 (15) CARRYING AMOUNTS At 31 December ,253 At 31 December ,060 HKFRS 3.76 HKAS During the financial year, the Group assessed the recoverable amount of goodwill, and determined that goodwill associated with the Group s toy operations was impaired by HK$15,000 (2006: nil). The recoverable amount of the toy operations was assessed by reference to value in use. A discount factor of 11% per annum (2006: 10.5% per annum) was applied in the value in use model. The main factor contributing to the impairment of the cash-generating unit was the failure of one of the newer product ranges to contribute to sales to the extent that product testing had predicted. No write-down of the carrying amounts of other assets in the cash-generating unit was necessary. The goodwill is included in the toy reportable segment disclosed in note 6. Particulars regarding impairment testing on goodwill are disclosed in note

131 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 22. Impairment testing on goodwill HKAS HKAS As explained in note 6, the Group uses business segments as its primary segment for reporting segment information. For the purposes of impairment testing, goodwill set out in note 21 has been allocated to the following cash generating units (CGUs). The carrying amount of goodwill (net of accumulated impairment losses) as at 31 December 2007 is allocated as follows: HK$ 000 HK$ 000 Widget operations - PRC 8,500 8,500 Widget operations - Malaysia 4,000 4,000 Widget operations - Hong Kong 3,000 3,000 Construction operations - Hong Kong - 1,147 Bicycle operations - 3,080 Toy operations 4,318 4,333 Other operations Widget operations - PRC and Hong Kong 20,253 24,060 The widget operations in PRC and Hong Kong produce similar products, and their recoverable amounts are based on many of the same key assumptions. The recoverable amount of both CGUs is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 10% per annum (2006: 9.5% per annum). Cash flow projections during the budget period for both CGUs are also based on the same expected gross margins during the budget period and the same raw materials price inflation during the budget period. Both sets of cash flows beyond that five year period have been extrapolated using a steady 11% per annum growth rate. This growth rate exceeds by 0.5 percentage points the long-term average growth rate for the international widgets market. However, among other factors, the widgets operations - PRC and Hong Kong benefit from the protection of a 20-year patent on its Series Z widgets, granted in 2002, which is still acknowledged as being one of the top widget models in the market. Management believes that an 11% per annum growth rate is reasonable in the light of that patent, and of other widget-related products being developed, and its intentions of focusing its operations in this industry. 119

132 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Widget operations - Malaysia The recoverable amount of the widget operations - Malaysia unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 11% per annum (2006: 10.5% per annum). Cash flows beyond that five year period have been extrapolated using a steady 11% per annum growth rate. This growth rate exceeds by 0.5 percentage points the long-term average growth rate for the international widgets market. However, the management believes, as described above, that this rate is reasonable. Toy operations The recoverable amount of the toy operations unit is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 11% per annum (2006: 10.5% per annum). Cash flows beyond that five year period have been extrapolated using a steady 8% per annum growth rate. This growth rate does not exceed the long-term average growth rate for the market in which the toy operations operate. The key assumptions used in the value in use calculations for the widget and toy operations are as follows: Budgeted market share Average market share in the period immediately before the budget period, plus a growth of 1-2% of market share per year. The values assigned to the assumption reflects past experience, except for the growth factor, which is consistent with management plans for focusing operations in the widget and toy industries. Management believes that the planned market share growth per year for the next five years is reasonably achievable. Budgeted gross margin Average gross margins achieved in the period immediately before the budget period, increased for expected efficiency improvements. This reflects past experience, except for efficiency improvements. Management expects efficiency improvements of 3-5% per year to be reasonably achievable. Raw materials price inflation Forecast consumer price indices during the budget period for the countries from which raw materials are purchased. The values assigned to the key assumption are consistent with external sources of information. 120

133 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS (c), (e) 23. Other intangible assets Capitalised development cost Patents Trademarks Licenses Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 COST At 1 January ,230 5,825 4,711 6,940 20,706 Exchange adjustments Additions Acquired on acquisition of a subsidiary Disposals or classified as held for sale Other [describe] At 31 December ,588 5,825 4,711 6,940 21,064 Exchange adjustments Additions Acquired on acquisition of a subsidiary Disposals or classified as held for sale Other [describe] At 31 December ,594 5,825 4,711 6,940 21,070 HKAS HKAS AMORTISATION AND IMPAIRMENT At 1 January 2006 (1,000) (874) (3,533) (2,776) (8,183) Exchange adjustments Provided for the year (682) (291) (236) (347) (1,556) Disposals or classified as held for sale Impairment losses recognised Other [describe] At 31 December 2006 (1,682) (1,165) (3,769) (3,123) (9,739) Exchange adjustments Provided for the year (718) (291) (236) (347) (1,592) Disposals or classified as held for sale Impairment losses recognised Other [describe] At 31 December 2007 (2,400) (1,456) (4,005) (3,470) (11,331) CARRYING AMOUNTS At 31 December ,194 4, ,470 9,739 At 31 December ,906 4, ,817 11,

134 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS (d) HKAS The amortisation expense has been included in the line item [depreciation and amortisation expense/cost of sales/other expenses] in the consolidated income statement. The above intangible assets have definite useful lives. Such intangible assets are amortised on a straight-line basis over the following periods: Capitalised development costs Patents Trademarks Licenses 5 years 20 years 20 years 20 years 122

135 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 24. Interests in associates HK$ 000 HK$ 000 Sch 10:9(1) Cost of investments in associates Listed in Hong Kong 1,856 1,856 Unlisted 3,824 3,824 Share of post-acquisition profits, net of dividends received 2,745 1,589 8,425 7,269 HKAS s129(1)&(2) s129(4)&(5) Fair value of listed investments 2,221 2,069 As at 31 December 2007 and 2006, the Group had interests in the following associates: Proportion of nominal value of issued capital Form of Principal /registered Proportion Name of business Place of place of Class of capital held of voting Principal entity structure incorporation operation share held by the Group power held activities A Plus Limited Incorporated Malaysia Malaysia Ordinary 17% 17% (Note 1) Transport B Plus Limited Incorporated Japan Japan Ordinary 56% 56% (Note 2) Finance C Plus Limited Incorporated Malaysia Malaysia Ordinary 25% 25% Transport Notes: HKAS 28.37(c),(d) HKAS 27.40(d) HKAS 28.37(e) 1) The Group is able to exercise significant influence over A Plus Limited because it has the power to appoint two out of the six directors of that company. 2) The Group holds 56% of the issued share capital of B Plus Limited and controls 56% of the voting power in general meeting. However, under a shareholders agreement, the other shareholder controls the composition of the board of directors of B Plus Limited and therefore the Group does not control B Plus Limited. The directors of the Company consider that the Group does exercise significant influence over B Plus Limited and it is therefore classified as an associate of the Group. The financial year end date for B Plus Limited is 31 Oct. For the purpose of applying the equity method of accounting, the consolidated financial statements of B Plus Limited for the year ended 31 October 2007 (2006: 31 October 2006) have been used as the Group considers that it is impracticable for B Plus Limited to prepare a separate set of financial statements as of 31 December. Appropriate adjustments have been made accordingly for the effects of significant transactions between that date and 31 December

136 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS The summarised financial information in respect of the Group s associates is set out below: HK$ 000 HK$ 000 Total assets 42,932 38,178 Total liabilities (14,848) (12,218) Net assets 28,084 25,960 Group s share of net assets of associates 8,425 7,269 Revenue 12,054 11,904 Profit for the year 3,953 5,479 Group s share of profits of associates for the year 1,186 1,

137 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 25. Joint ventures HKAS s129(1)&(2) s129(4)&(5) As at 31 December 2007 and 2006, the Group had interests in the following significant jointly controlled entities: Proportion of nominal value of Form of Principal issued capital Proportion Name of business Place of place of Class of held by of voting Principal entity structure incorporation operation share held the Group power held activities A JV Limited Incorporated Hong Kong Hong Kong Ordinary 25% 25% Manufacture of electronic equipment B JV Limited Incorporated Hong Kong Hong Kong Ordinary 40% 40% Rental HKAS The summarised financial information in respect of the Group s jointly controlled entities which are accounted for using proportionate consolidation with the line-by-line reporting format is set out below: HK$ 000 HK$ 000 Current assets 1,800 1,850 Non-current assets 8,993 9,854 Current liabilities Non-current liabilities 5,858 5,521 Income 2,124 2,005 Expenses 1,787 1,

138 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS Held-to-maturity investments Held-to-maturity investments comprise: HK$ 000 HK$ 000 Debt securities (Note) 6,863 5,262 Analysed for reporting purposes as: Current assets 4,804 3,604 Non-current assets 2,059 1,658 6,863 5,262 Note: HKFRS 7.7 The debt securities are listed in Hong Kong and carry fixed interest at 6.5% (2006: 6%-7.5%) per annum, payable monthly, and will mature from March 2008 to March 2009 (2006: June 2007 to March 2009). 126

139 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 27. Available-for-sale investments HKFRS 7.7 Available-for-sale investments comprise: Sch 10:9(1) Sch 10:9(3) HK$ 000 HK$ 000 Listed investments: - Equity securities listed in Hong Kong 3,200 3,036 - Equity securities listed elsewhere Debt securities listed in Hong Kong (Note 1) 2,200 2,122 5,400 5,158 Unlisted securities: - Equity securities (Note 2) 2,740 2,700 Total 8,140 7,858 Analysed for reporting purposes as : Current assets - - Non-current assets 8,140 7,858 8,140 7,858 Notes: 1) The Group holds listed redeemable notes with fixed interest of 7% (2006: 6.75%) per annum. The notes are redeemable at par value in 2009 (2006: redeemable at par value in 2010). HKAS 28.37(d) 2) The Group holds 20% (2006: 20%) of the ordinary share capital of Rocket Corp Limited, a company involved in the refining and distribution of fuel products. The directors of the Group do not believe that the Group is able to exert significant influence over Rocket Corp Limited as the other 80% of the ordinary share capital is controlled by one shareholder, who also manages the day-to-day operations of that company. HKFRS 7.27(c) The unlisted equity securities are measured at fair value. Fair value is estimated using a discounted cash flow model, which includes some assumptions that are not supportable by observable market prices or rates. In determining the fair value, an earnings growth factor of 5.2% (2006: 4.9%) and a risk adjusted discount factor of 12.2% (2006: 11.9%) are used. 127

140 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 28. Finance lease receivables HKAS HKFRS 7.7 Certain of the Group s widget storage equipment are leased out under finance leases. All leases are denominated in Hong Kong dollars. All interest rates inherent in the leases are fixed at the respective contract dates over the lease terms. Present value Minimum of minimum lease payments lease payments HK$ 000 HK$ 000 HK$ 000 HK$ 000 Finance lease receivables comprise: Within one year In more than one year but not more than five years 1, In more than five years ,356 1,188 1, Less: unearned finance income (328) (283) N/A N/A Present value of minimum lease payment receivables 1, , Analysed for reporting purposes as: Current assets Non-currents assets , HKAS 17.47(c) The average effective interest rate of the above finance leases is approximately 10.5% (2006: 11%) per annum. Unguaranteed residual values of assets leased under finance leases are estimated at HK$37,000 (2006: HK$42,000). HKFRS 7.15 Finance lease receivable balances are secured over the storage equipment leased. The Group is not permitted to sell or repledge the collateral in the absence of default by the lessee. 128

141 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 29. Deferred taxation The following are the major deferred tax balances recognised and movements thereon during the current and prior year: HKAS 12.81,(g) Deferred tax liabilities: Accelerated Revaluation Undistributed Available tax Intangible of Convertible Hedging profits of for-sale depreciation assets properties loan notes instruments associates investments Others Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January , ,443 Charge (credit) to consolidated income statement for the year 188 (97) Charge to equity for the year Recycled to income (86) (86) At 31 December , ,616 Charge (credit) to consolidated income statement for the year 1,929 (129) - (9) ,159 Charge to equity for the year Recycled to income (114) (114) Acquisition/disposals (606) (606) Effect of change in tax rate (397) (85) (482) At 31 December , ,974 HKAS 12.81,(g) Deferred tax assets: Doubtful Tax debts Provisions losses Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January , ,814 Credit (charge) to consolidated income statement for the year 179 (20) (50) 109 Charge to equity for the year At 31 December ,672-1,923 Credit (charge) to consolidated income statement for the year (8) Charge to equity for the year Acquisition/disposals (4) - - (4) At 31 December ,714-1,

142 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued For the purpose of balance sheet presentation, certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes: HK$ 000 HK$ 000 Deferred tax assets 1,714 1,923 Deferred tax liabilities (6,305) (5,616) (4,591) (3,693) Deferred tax liabilities associated with assets held for sale (note 12) (430) - (5,021) (3,693) HKAS 12.81(e) At the balance sheet date, the Group has unused tax losses of HK$3 million (2006: HK$3 million) available for offset against future profits that may be carried forward indefinitely. No deferred tax asset has been recognised in respect of the tax losses due to the unpredictability of future profit streams. HKFRS 7.7 HKFRS Other financial assets/liabilities Other Financial Assets Current Non-current HK$ 000 HK$ 000 HK$ 000 HK$ 000 Derivatives under hedge accounting Fair value hedges Interest rate swaps Cash flow hedges Foreign currency forward contracts Other [describe] Other Financial Liabilities Financial guarantee contracts Derivatives under hedge accounting Fair value hedges Interest rate swaps Cash flow hedges Foreign currency forward contracts Other [describe]

143 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Fair value hedges: The Group uses interest rate swaps to minimise its exposure to fair value changes of its fixed-rate Hong Kong dollar borrowings by swapping a proportion of the fixed-rate borrowings from fixed rates to floating rates. The interest rate swaps and the corresponding borrowings have the same terms and the directors of the Company consider that the interest rate swaps are highly effective hedging instruments. Major terms of the interest rate swaps are set out below: 2007 Notional amount Maturity Swaps HK$1,000,000 30/09/ % for HIBOR HK$2,000,000 31/05/ % for HIBOR HK$3,000,000 31/12/ % for HIBOR 2006 Notional amount Maturity Swaps HK$1,000,000 15/04/ % for HIBOR HK$1,000,000 30/09/ % for HIBOR HKFRS 7.34 Note: The table above provides an example of summary quantitative data about exposure to interest rate risk at the reporting date that an entity may provide internally to key management personnel. During the year, the hedge was 100% (2006: 100%) effective in hedging the fair value exposure to interest rate movements and as a result the carrying amount of the loan was adjusted by HK$35,000 (2006: HK$27,000) which was included in profit or loss at the same time that the fair value of the interest rate swap was included in profit or loss. HKFRS 7.27 The fair values of Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates. Cash flow hedges: At balance sheet date, the Group had the following foreign exchange forward contracts designated as highly effective hedging instruments in order to manage the Group s foreign currency exposure in relation to foreign currency forecast sales and foreign currency denominated monetary items. The terms of the foreign exchange contracts have been negotiated to match the terms of the respective designated hedged items. 131

144 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Major terms of these contracts are as follows: 2007 Notional amount Maturity Exchange rates Buy RMB 5.5 million 15/03/2008 HK$1: RMB Sell RMB 1 million 15/06/2008 HK$1: RMB Sell RMB 3.3 million 30/04/2008 HK$1: RMB Sell RMB 1.7 million 31/08/2008 HK$1: RMB Notional amount Maturity Exchange rates Buy RMB 4 million 31/03/2007 HK$1: RMB Sell RMB 1 million 30/06/2007 HK$1: RMB Sell RMB 4.5 million 15/07/2007 HK$1: RMB HKFRS 7.34 Note: The table above provides an example of summary quantitative data about exposure to foreign exchange risk at the reporting date that an entity may provide internally to key management personnel. During the current year, fair value gains of HK$0.436 million (2006: HK$0.316 million) have been deferred in equity and are expected to be released to the consolidated income statement at various dates in the coming six months after the balance sheet date, the period in which sales are expected to occur. At the start of the third quarter of 2007, the Group reduced its forecasts on sales of widgets due to increased local competition. The Group had previously hedged HK$1.079 million of future sales of which HK$0.097 million are no longer expected to occur, and HK$0.982 million remain highly probable. Accordingly, the Group had recycled HK$3,000 of gains on foreign currency forward contracts relating to forecast transactions that are no longer expected to occur from the hedging reserve into profit and loss. HKFRS 7.23(d) During the year, gains and losses transferred from equity into profit or loss are included in the following line items in the consolidated income statement: HK$ 000 HK$ 000 Revenue Other gains and losses 27 - Finance costs - - Other expenses - (15) Income tax expense (114) (86) Other [describe] HKFRS 7.27 The fair values of foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. 132

145 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 31. Inventories HK$ 000 HK$ 000 HKAS 2.36 Raw materials 4,972 8,322 Work in progress 1,980 2,454 Finished goods 12,762 11,018 19,714 21,794 Classified as part of a disposal group held for sale (see note 12) (830) - 18,884 21,794 HKAS 1.52 Inventories of HK$1.29 million (2006: HK$0.86 million) are expected to be recovered after more than twelve months. HKFRS 7.7 HKFRS Loan receivables HK$ 000 HK$ 000 Loan to associates 2,981 2,981 The Group has provided short-term loans to associates which are renewable on an annual basis. The effective interest for the current year is 5% (2006: 5%). HKFRS Amounts due from directors s161b Directors current accounts/loans to officers disclosed pursuant to section 161B of the Companies Ordinance are as follows: Maximum amount Terms Balance at Balance at outstanding Director of loan 31/12/2007 1/1/2007 during the year HK$ 000 HK$ 000 HK$ 000 Gary D.K. Wong Daniel D.D. Lee Secured on property, repayable within one year, interest free (Note) Unsecured, repayable within one year, interest free Note: HKFRS 7.15 The loan is secured over a property owned by Gary D.K. Wong. The Group is not permitted to sell or repledge the collateral in the absence of default by that director. 133

146 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 34. Trade and other receivables HK$ 000 HK$ 000 Trade receivables 18,034 16,700 Less: Allowance for doubtful debts (798) (758) 17,236 15,942 Deferred consideration (note 48) Prepaid lease payments Other [describe] Total trade and other receivables 18,350 16,062 App 16.4(2)(ii) GR 18.50B(2)(ii) The following is an aged analysis of trade receivables net of allowance for doubtful debts at the balance sheet date: HK$ 000 HK$ days 15,674 14, days 1, days ,236 15,942 HKFRS 7.36(c),37 HKFRS 7.36(c) HKFRS 7.34(c) HKFRS 7.36(c),37 The average credit period on sales of goods is 60 days. The Group has provided fully for all receivables over 120 days because historical experience is such that receivables that are past due beyond 120 days are generally not recoverable. Before accepting any new customer, the Group uses an external credit scoring system to assess the potential customer s credit quality and defines credit limits by customer. Limits and scoring attributed to customers are reviewed twice a year. 80% of the trade receivables that are neither past due nor impaired have the best credit scoring attributable under the external credit scoring system used by the Group. Included in the Group s trade receivable balance are debtors with a carrying amount of HK$1.899 million (2006: HK$1.081 million) which are past due at the reporting date for which the Group has not provided for impairment loss. The Group does not hold any collateral over these balances. The average age of these receivables is 84 days (2006: 85 days). 134

147 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 7.37 Ageing of trade receivables which are past due but not impaired HK$ 000 HK$ days 1, days Total 1,899 1,081 HKFRS 7.16 Movement in the allowance for doubtful debts HK$ 000 HK$ 000 HKFRS 7.20(e) Balance at beginning of the year Impairment losses recognised on receivables Amounts written off as uncollectible - (32) Amounts recovered during the year - (94) Impairment losses reversed - - Unwind of discount - - Balance at end of the year HKFRS 7.37 HKFRS 7.37(c) HKFRS 7.37 Included in the allowance for doubtful debts are individually impaired trade receivables with a balance of HK$40,000 (2006: HK$52,000) which have been placed under liquidation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group does not hold any collateral over these balances. Ageing of impaired trade receivables HK$ 000 HK$ days days days Total Included in the trade receivables are amounts from related parties amounted to HK$636,000 (2006: HK$632,000). No impairment has been made to receivables from related parties (see note 57). Transfer of financial assets HKFRS 7.13 HKFRS 7.14 During the year, the Group transferred HK$1,052,000 (2006: nil) of trade receivables to an unrelated entity. As part of the transfer, the Group provided the transferee a credit guarantee over the expected losses of those receivables. Accordingly, the Group continues to recognise the full carrying amount of the receivables and has recognised the cash received on the transfer as a secured borrowing (see note 39). At 31 December 2007, the carrying amount of the transferred short-term receivables is HK$946,000 (2006: nil). The carrying amount of the associated liability is HK$923,000 (2006: nil). 135

148 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 35. Amounts due from (to) customers for contract work Contracts in progress at the balance sheet date HK$ 000 HK$ 000 HKAS Contract costs incurred plus recognised profits less recognised losses 1,517 1,386 Less: progress billings (1,313) (1,171) HKAS Analysed for reporting purposes as: Amounts due from contract customers Amounts due to contract customers (36) (15) HKAS 11.40(c) At 31 December 2007, retentions held by customers for contract works amounted to HK$75,000 (2006: HK$69,000). Advances received from customers for contract work amounted to HK$14,000 (2006: nil). 36. Held-for-trading investments (other than derivatives) HKFRS 7.7 Held-for-trading investments include: Sch 10.9(1) Sch 10.9(3) HK$ 000 HK$ 000 Listed securities: - Equity securities listed in Hong Kong 10,250 6,480 - Equity securities listed elsewhere 2,230 1,968 12,480 8,

149 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 37. Bank balances/pledged bank deposits/bank overdrafts Bank balances carry interest at market rates which range from 3% to 5.5% (2006: 3.5% to 4%). The pledged bank deposits carry fixed interest rate of 4.5% (2006: 4.25%). Bank overdrafts carry interest at market rates which range from 5.5% to 6.5% (2006: 6% to 6.75%). HKFRS 7.14 Pledged bank deposits represents deposits pledged to banks to secure banking facilities granted to the Group. Deposits amounting to HK$2 million (2006: HK$2 million) have been pledged to secure bank overdrafts and short-term bank loans and are therefore classified as current assets. The pledged bank deposits will be released upon the settlement of relevant bank borrowings. 38. Trade and other payables HK$ 000 HK$ 000 Trade payables 16,276 21,128 Other payables ,366 21,223 App 16.4(2)(c)(iii) GR 18.50B(2)(c)(ii) The following is an aged analysis of trade payables at the balance sheet date: HK$ 000 HK$ days 9,950 11, days 4,803 6,233 >90 days 1,523 3,529 16,276 21,128 HKFRS 7.7 The average credit period on purchases of is 3 months. The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. Included above are payables to related parties amounted to HK$380,000 (2006: HK$217,000) (see note 57). 137

150 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 39. Borrowings HK$ 000 HK$ 000 Bank loans (Note 1) 14,982 17,404 Bills of exchange (Note 2) Collateralised borrowings (Note 3) Loans from related parties (Note 4) 12,917 34,124 Loans from other entities (Note 5) 21,361 4,437 50,541 56,881 Sch 10:10 App (1) GR Secured 15,960 17,739 Unsecured 34,581 39,142 50,541 56,881 Carrying amount repayable: On demand or within one year 21,899 25,168 More than one year, but not exceeding two years 14,074 16,167 More than two years but not more than five years 8,921 9,218 More than five years 5,647 6,328 50,541 56,881 Less: Amounts due within one year shown under current liabilities (21,899) (25,168) 28,642 31,713 HKFRS 7.7 HKFRS 7.14 Notes: 1) Secured by a mortgage over the Group s freehold land and buildings (see note 54) and bear interest at HIBOR % (2006: HIBOR %). The weighted average effective interest rate on the bank loans is 8.1% per annum (2006: 8.32% per annum). 2) Bills of exchange with a variable interest rate were issued in The weighted average effective interest rate on the bills is 6.8% per annum (2006: 6.8% per annum) 3) Secured by a charge over certain of the Group s trade receivables (see notes 34 and 54). 4) Bear interest at HIBOR + 2.5% (2006: HIBOR + 2.5%). Interest of 7.0% - 8.2% per annum is charged on the outstanding loan balances (2006: 8.0% - 8.2% per annum). 5) Fixed rate loans with a finance company amounted to approximately HK$ 6 million (2006: HK$ 2 million) with maturity periods not exceeding 3 years (2006: 2 years). The weighted average effective interest rate on the fixed rate loans is 7.15% per annum (2006: 8.10% per annum). The Group enters into interest rate swaps to exchange fixed rate interest for variable rate interest in order to hedge against the fair value interest rate risk (see note 30). The remaining balance of approximately HK$ 15.4 million (2006: HK$ 2.4 million) carries interest at HIBOR % (2006: HIBOR + 2%), ranging from 6.5% - 9% per annum (2006: 7.3% - 8.5% per annum) during the current year. 138

151 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 7.18 During 2007, the Group was late in paying interest for the first quarter on one of its loans with a carrying amount of HK$5 million. The delay arose because of a temporary lack of funds on the date interest was payable due to a technical problem on settlement. The interest payment outstanding of HK$107,500 was repaid in full on the following day, including the additional interest and penalty. The lender did not request accelerated repayment of the loan and the terms of the loan were not changed. Management has reviewed the Group s settlement procedures to ensure that such circumstances do not recur. 40. Obligations under finance leases HKAS 17.31(e) HKFRS 7.7 It is the Group s policy to lease certain of its manufacturing equipment under finance leases. The average lease term is 5 years (2006: 5 years). Interest rates underlying all obligations under finance leases are fixed at respective contract dates ranging from 3.5% to 5.5% (2006: 3.75% - 6%) per annum. These leases have no terms of renewal or purchase options and escalation clauses. No arrangements have been entered into for contingent rental payments. Present value Minimum of minimum lease payments lease payments HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKAS Amounts payable under finance leases: Within one year In more than one year but not more than five years In more than five years Less: future finance charges (2) (13) N/A N/A Present value of lease obligations Less: Amount due for settlement within 12 months shown under current liabilities) (9) (54) HKAS 1.52 Sch 10:10 HKFRS 7.31 Amount due for settlement after 12 months 5 35 The Group s obligations under finance leases are secured by the charge over the leased assets. Financial lease obligations are denominated in Hong Kong dollars, currency other than the functional currency of the group entity. 139

152 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS Sch 10:6&7 41. Provisions Employee Rectification benefits work Warranties Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Note 1) (Note 2) (Note 3) At 1 January ,388-1,185 5,573 Additional provisions recognised - 4, ,914 Utilisation of provision (3,174) (1,112) (515) (4,801) Unwinding of discount Acquisition of Subsix Limited Other [describe] At 31 December ,259 3,058 1,442 5, HK$ 000 HK$ 000 Analysed for reporting purposes as: Current liabilities 3,461 3,247 Non-current liabilities 2,298 2,326 5,759 5,573 HKAS Notes: HKFRS ) The provision for employee benefits represents annual leave and vested long service leave entitlements accrued and compensation claims made by employees. On the acquisition of Subsix Limited, the Group recognised an additional contingent liability in respect of employees compensation claims outstanding against that Company, which will be settled in February ) The provision for rectification work relates to the estimated cost of work agreed to be carried out for the rectification of goods supplied to one of the Group s major customers (see note 13). Anticipated expenditure for 2008 is HK$1.94 million, and for 2009 is HK$1.118 million. These amounts have not been discounted for the purpose of measuring the provision for rectification work, because the effect is not material. 3) The provision for warranty claims represents the present value of the directors best estimate of the future outflow of economic benefits that will be required under the Group s warranty program for electronic toys. The estimate has been made on the basis of historical warranty trends and may vary as a result of new materials, altered manufacturing processes or other events affecting product quality. 140

153 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 1.76 Sch 10:2 42. Share capital Authorised Number of shares Share Capital HK$ 000 HK$ million ordinary shares of HK$1 each 200, , , ,000 Issued and fully paid At beginning of year 23,005 23,005 23,005 23,005 Repurchase of shares (5,500) - (5,500) - Exercise of share options At end of year 17,819 23,005 17,819 23,005 During the year, the Company repurchased its own shares through the Stock Exchange of Hong Kong Limited as follows: Aggregate Month of No. of ordinary Price per share consideration repurchase shares at HK$1 each Highest Lowest paid 000 HK$ HK$ HK$ 000 November , ,270 December , ,731 The above shares were cancelled upon repurchase. None of the Company s subsidiaries repurchased, sold or redeemed any of the Company s listed shares during the year. 141

154 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS Share premium and reserves Attributable to equity holders of the Company Convertible loan notes Properties Investments Share Share options Share equity revaluation revaluation Translation options Hedging Retained reserve of a Minority premium reserve reserve reserve reserve reserve reserve profits Total subsidiary interests Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January , , ,289-16, ,031 Surplus on revaluation of properties - - 1, , ,643 Gain on cash flow hedges Gain on fair value changes of available-for-sale investments Exchange differences arising on translation of foreign operations Deferred tax - - (493) (24) - - (95) - (612) - - (612) Net income (expense) recognised - - 1, , ,513 directly in equity Profit for the year ,569 27,569-2,763 30,332 Transfer to profit or loss on sale of available-for-sale investments Transfer to profit or loss on cash flow hedges (287) - (287) - - (287) Transfer to initial carrying amount of non-financial items on cash flow hedges Deferred tax on transfer to profit or loss Total recognised income for the year - - 1, ,569 28,881-2,763 31,644 Recognition of equity-settled share based payments Dividends recognised as distribution (6,479) (6,479) - - (6,479) At 31 December ,474-1, , , , ,034 Note: Where the entity has adopted the approach to present changes in equity representing income and expense in a separate component of the financial statements as illustrated in Alt 2 on page 69, a reconciliation of opening and closing balances of share capital (note 42), share premium and reserves should be given in the notes. 142

155 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Attributable to equity holders of the Company Convertible loan notes Properties Investments Share Share options Share equity revaluation revaluation Translation options Hedging Retained reserve of a Minority premium reserve reserve reserve reserve reserve reserve profits Total subsidiary interests Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 January ,474-1, , , , ,034 Gain on cash flow hedges Gain on fair value changes of available-for-sale investments Exchange differences arising on translation of foreign operations Deferred tax (28) - - (131) - (159) - - (159) Net income (expenses) recognised directly in equity Profit for the year ,552 22,552-4,000 26,552 Transfer to profit or loss on cash flow hedges (380) - (380) - - (380) Transfer to initial carrying amount of non-financial items on cash flow hedges Deferred tax on transfer to profit or loss Transfer to profit or loss on disposal of foreign operation (120) (120) - - (120) Total recognised income and expense for the year (31) ,552 22,626-4,000 26,626 Recognition of equity-settled share based payments Transaction costs attributable to issue of new shares (6) (6) - - (6) Issue of ordinary shares upon exercise of share options (361) Repurchase of shares (10,848) (555) (11,403) - - (11,403) Transaction costs attributable to repurchase of shares (193) (193) - - (193) Issue of convertible notes Dividends recognised as distribution (6,635) (6,635) - - (6,635) Transfer to retained earnings - - (3) Deferred tax - (242) (242) - - (242) At 31 December , , , , , ,221 Note: See previous page for the explanation on inclusion of this note. 143

156 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 44. Convertible loan notes HKFRS million Hong Kong dollar denominated convertible loan notes were issued by the Company on 1 September 2007 at an issue price of HK$1.10 per note. Each note entitles the holder to convert to one ordinary share at a conversion price of HK$1.25. Conversion may occur at any time between 1 July 2010 and 31 August If the notes have not been converted, they will be redeemed on 1 September 2010 at HK$1.00. Interest of 5.5% per annum will be paid up until that settlement date. The convertible loan notes contain two components, liability and equity elements. The equity element is presented in equity heading convertible loan notes - equity reserve. The effective interest rate of the liability component is 8%. The movement of the liability component of the convertible loan notes for the year is set out below: HK$ 000 Proceeds of issue 4,950 Equity component (834) Liability component at date of issue 4,116 Interest charged 110 Interest paid (82) Liability component at 31 December ,

157 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS 1.124A HKAS 1.124B 45. Capital risk management Note: The following are examples of the types of disclosures that might be required in this area. The matters disclosed will be dictated by the circumstances of the individual entity, and based on information provided internally to the entity s key management personnel. The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group s overall strategy remains unchanged from prior year. The capital structure of the Group consists of debt (which includes borrowings, convertible loan notes and obligations under finance leases), cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued share capital, reserves and retained profits. Gearing ratio The Group s risk management committee reviews the capital structure on a semi-annual basis. As part of this review, the committee considers the cost of capital and the risks associated with each class of capital. The Group has a target gearing ratio of 20-25% determined as the proportion of net debt to equity. Based on the committee s recommendations, the Group expects to increase its gearing ratio closer to 25% through the issue of new debt and the payment of dividends. The gearing ratio at the year end was as follows: HK$ 000 HK$ 000 Debt (i) 54,699 56,970 Cash and cash equivalents (17,836) (17,400) Net debt 36,863 39,570 Equity (ii) 171, ,039 Net debt to equity ratio 22% 24% (i) Debt comprises long- and short-term borrowings, obligations under finance leases and convertible loan notes as detailed in notes 39, 40 and 44 respectively. (ii) Equity includes all capital and reserves of the Group. 145

158 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 46. Financial instruments 46.1 Categories of financial instruments Financial assets HK$ 000 HK$ 000 HKFRS 7.8 HKFRS 7.8 Fair value through profit or loss Held for trading 12,480 8,448 Designated as at FVTPL (see below) - - Derivative instruments in designated hedge accounting relationships HKFRS 7.8 HKFRS 7.8(c) HKFRS 7.8(d) Held-to-maturity investments 6,863 5,262 Loans and receivables (including cash and cash equivalents) 44,012 38,808 Available-for-sale financial assets 8,140 7,858 Financial liabilities HKFRS 7.8(e) HKFRS 7.8(e) Fair value through profit or loss Held for trading - - Designated as at FVTPL (see below) - - Derivative instruments in designated hedge accounting relationships 98 - HKFRS 7.8(f) Amortised cost 74,843 78,482 Financial guarantee contracts 6 18 Loans or receivables designated as at FVTPL Carrying amount of loans or receivables designated as at FVTPL - - HKFRS 7.9(c) HKFRS 7.9(c) Cumulative changes in fair value attributable to changes in credit risk - - Changes in fair value attributable to changes in credit risk recognised during the year - - HKFRS 7.9,(d) Credit derivatives over loans or receivables at fair value HK$ 000 HK$ 000 Opening fair value - - Additions during the year - - Realised during the year - - Change in fair value - - Closing fair value

159 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Financial liabilities designated as at FVTPL HK$ 000 HK$ 000 HKFRS 7.10 Difference between carrying amount and maturity amount Fair value - - Amount payable at maturity HKFRS 7.10 HKFRS 7.10 Cumulative changes in fair value attributable to changes in credit risk (i) - - Changes in fair value attributable to changes in credit risk recognised during the period (i) - - HKFRS 7.11 (i) The change in fair value attributable to change in credit risk is calculated as the difference between total change in fair value of financial liabilities designated as at FVTPL and the change in fair value of financial liabilities designated as at FVTPL due to change in market risk factors alone. The change in fair value due to market risk factors was calculated using benchmark interest yield curves as at the balance sheet date holding credit risk margin constant. The fair value of financial liabilities designated as at FVTPL was estimated by discounting future cash flows using quoted benchmark interest yield curves as at the balance sheet date and by obtaining lender quotes for borrowing of similar maturity to estimate credit risk margin. HKFRS Financial risk management objectives and policies The Group s Corporate Treasury function provides services to the business units, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group s policies approved by the board of directors, which provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed by the internal auditors on a continuous basis. The Group does not enter into or trade derivative financial instruments for speculative purposes. The Corporate Treasury function reports quarterly to the Group s risk management committee, an independent body that monitors risks and policies implemented to mitigate risk exposures. 147

160 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS Market risk HKFRS 7.22 The Group s activities expose it primarily to the financial risks of changes in foreign currency exchange rates, interest rates and equity prices. The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risks, including: forward foreign exchange contracts to hedge the exchange rate risk in relation to foreign currency denominated monetary items and sales of widgets to PRC; and interest rate swaps to mitigate the fair value interest rate risk. Market risk exposures are measured using value-at-risk (VaR) and are supplemented by sensitivity analysis. HKFRS 7.33(c) HKFRS 7.41 There has been no change to the Group s exposure to market risks or the manner in which it manages and measures the risk Value at Risk (VaR) analysis The VaR risk measure estimates the potential loss in pre-taxation profit over a given holding period for a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognising offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by the Group reflects the 99% probability that the daily loss will not exceed the reported VaR. VaR methodologies employed to calculate daily risk numbers include the historical and variancecovariance approaches. In addition to these two methodologies, Monte Carlo simulations are applied to the various portfolios on a monthly basis to determine potential future exposure. Historical VaR Average Minimum Maximum Year end (99%, one-day) by risk type HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Foreign exchange 980 1, ,200 1, ,350 Interest rate Diversification (45) (40) (55) (50) Total VaR exposure 1,050 1, ,030 1,355 While VaR captures the Group s daily exposure to currency and interest rate risk, sensitivity analysis evaluates the impact of a reasonably possible change in interest or foreign currency rates over a year. The longer time frame of sensitivity analysis complements VaR and helps the Group to assess its market risk exposures. Details of sensitivity analysis for foreign currency risk and interest rate risk are set out. 148

161 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 7.33, Foreign currency risk management Several subsidiaries of the Group have foreign currency sales and purchases, which expose the Group to foreign currency risk. Approximately 28% of the Group s sales are denominated in currencies other than the functional currency of the group entity making the sale, whilst almost 90% of costs are denominated in the group entity s respective functional currencies. The carrying amounts of the Group s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Liabilities Assets HK$ 000 HK$ 000 HK$ 000 HK$ 000 RMB 8,297 7,469 1,574 1,671 Euro Other The Group requires all its group entities to use foreign exchange forward contracts to eliminate the currency exposures on any individual transactions in excess of HK$0.5 million. Other transaction that involves less than HK$0.5 million may also be hedged on a case-by-case basis. The foreign exchange forward contracts must be in the same currency as the hedged item. On this basis, the Group has entered into such forward contracts in relation to the foreign currency denominated monetary assets and monetary liabilities amounting to RMB1 million and RMB5.5 million (2006: RMB1 million and RMB4 million) respectively. It is the Group s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness (see note 30 for details). Sensitivity analysis HKFRS 7.B8 HKFRS 7.40 HKFRS 7.34 The Group is mainly exposed to the effects of fluctuation in RMB and Euro. The following table details the Group s sensitivity to a 5% increase and decrease in the Hong Kong dollars against the relevant foreign currencies. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes outstanding foreign currency denominated monetary items and foreign currency forward contracts designated as cash flow hedges, and adjusts their translation at the period end for a 5% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in profit and other equity where the Hong Kong dollars strengthen 5% against the relevant currency. For a 5% weakening of the Hong Kong dollars against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative. Impact of RMB Impact of Euro HK$ 000 HK$ 000 HK$ 000 HK$ 000 HKFRS 7.40 HKFRS 7.40 Profit or loss (i) (iii) Other equity (ii) - - (i) This is mainly attributable to the exposure outstanding on receivables and payables denominated in RMB not subject to cash flow hedge at year end. (ii) This is as a result of the changes in fair value of derivative instruments designated as cash flow hedges in relation to the Group s foreign currency forecast sales. (iii) This is mainly attributable to the exposure to outstanding payables denominated in Euro at the year end. 149

162 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 7.33(c) HKFRS 7.42 HKFRS 7.33, 34 The Group s sensitivity to foreign currency has decreased during the current year mainly due to the increase in use of foreign currency forward contracts to mitigate currency exposures. In management s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure does not reflect the exposure during the year. RMB denominated sales are seasonal with lower sales volumes in the last quarter of the financial year, which results in a reduction in RMB receivables at year end Interest rate risk management The Group s fair value interest rate risk relates primarily to fixed-rate borrowings from a financial institution (see note 39 for details of these borrowings). In relation to these fixed-rate borrowings, the Group enters into interest rate swaps to hedge against its exposures to changes in fair values of those borrowings. The critical terms of these interest rate swaps are similar to those of hedged borrowings. These interest rate swaps are designated as effective hedging instruments and hedge accounting is applied (see note 30 for details). The Group s cash flow interest rate risk relates primarily to variable-rate borrowings (see note 39 for details of these borrowings). It is the Group s policy to keep its borrowings at floating rate of interests so as to minimise the fair value interest rate risk. HKFRS 7.34(c) The Group s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note. The Group s cash flow interest rate risk is mainly concentrated on the fluctuation of HIBOR arising from the Group s Hong Kong dollar denominated borrowings. Sensitivity analysis HKFRS 7.40 HKFRS 7.34 HKFRS 7.40 The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the balance sheet date. For variable-rate borrowings, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was outstanding for the whole year. A 50 basis point increase or decrease in HIBOR is used when reporting interest rate risk internally to key management personnel and represents management s assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group s: profit for the year ended 31 December 2007 would decrease/increase by HK$43,000 (2006: decrease/increase by HK$93,000). This is mainly attributable to the Group s exposure to interest rates on its variable rate borrowings; and other equity reserves would decrease/increase by HK$19,000 (2006: decrease/increase by HK$12,000) mainly as a result of the changes in the fair value of available-for-sale fixed rate instruments. HKFRS 7.33(c) The Group s sensitivity to interest rates has decreased during the current period mainly due to the reduction in variable rate debt instruments. 150

163 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 7.33, 34 HKFRS 7.34(c) Other price risks The Group is exposed to equity price risk through its investment in listed equity securities. The management manages this exposure by maintaining a portfolio of investments with different risk and return profiles. The Group s equity price risk is mainly concentrated on equity securities operating in banking, telecommunication and construction industry sectors quoted in The Stock Exchange of Hong Kong Limited. In addition, the Group has appointed a special team to monitor the price risk and will consider hedging the risk exposure should the need arise. Sensitivity analysis HKFRS 7.40 HKFRS 7.40 The sensitivity analyses below have been determined based on the exposure to equity price risk at the reporting date. If equity prices had been 5% higher/lower: net profit for the year ended 31 December 2007 would increase/decrease by HK$605,000 (2006: increase/decrease by HK$417,000). This is mainly due to the changes in fair value of held-for-trading investments; and other equity reserves would increase/decrease by HK$297,000 (2006: increase/decrease by HK$286,000) as a result of the changes in fair value of available-for-sale investments. HKFRS 7.33(c) The Group s sensitivity to equity prices has not changed significantly from prior year. 151

164 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Credit risk HKFRS 7.36 HKFRS 7.B9 As at 31 December 2007, the Group s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties and financial guarantees provided by the Group is arising from: the carrying amount of the respective recognised financial assets as stated in the consolidated balance sheet; and the amount of contingent liabilities in relation to the financial guarantees provided by the Group as disclosed in note 51. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt and debt investments at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group s credit risk is significantly reduced. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. HKFRS 7.34(c) HKFRS 7.34(c) Other than concentration of credit risk on liquid funds which are deposited with several banks with high credit ratings, the Group does not have any other significant concentration of credit risk. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. The table below shows the credit limit and balance of 6 major counterparties (including liquid funds) at the balance sheet date using the Standard and Poor s credit rating symbols. 31/12/ /12/2006 Counterparty Credit Carrying Credit Carrying Location Rating limit amount limit amount HK$ 000 HK$ 000 HK$ 000 HK$ 000 Solar Bank PRC AA 10,000 7,940 10,000 7,900 AMA Bank Malaysia AA 10,000 4,800 10,000 4,650 North China Limited PRC A 9,000 3,450 9,000 3,360 Asia Win Limited Malaysia A 8,000 2,300 8,000 2,350 Top One Limited Germany B 2,000 1,100 2, Fortune Holding Limited Italy BB Liquidity risk management HKFRS 7.33, 39 Ultimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the Group s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. As at 31 December 2007, the Group has available unutilised overdrafts and short and medium term bank loan facilities of approximately HK$2 million (2006: HK$1 million) and HK$5 million (2006: 3 million) respectively. 152

165 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Liquidity tables HKFRS 7.34, 35, 39 The following tables detail the Group s remaining contractual maturity for its financial liabilities as well as derivative and certain non-derivative financial assets which are included in the maturity analysis provided internally to the key management personnel for the purpose of managing liquidity risk. For non-derivative financial assets, the tables have been drawn up based on the undiscounted contractual maturities of the financial assets including interest that will be earned on those assets except where the Group anticipates that the cash flow will occur in a different period. For nonderivative financial liabilities, the tables reflect the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows. For derivative instruments settle on a net basis, undiscounted net cash inflows/(outflows) are presented. Whereas they require gross settlement, the undiscounted gross inflows and (outflows) on these derivatives are shown in the table. HKFRS 7.34 Note: The tables below include the weighted average effective interest rate and the presentation of the corresponding carrying amount in the consolidated balance sheet as an example of summary quantitative data about exposure to interest rates at the reporting date that an entity may provide internally to key management personnel. Weighted Total average Total carrying effective 3 months undiscounted amount interest Less than to cash as at rate 1 month 1-3 months 1 year 1-5 years 5+ years flows 31/12/2007 % HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Non-derivative financial assets Equity securities ,592 4,137 6,212-17,489 15,412 Debt securities 6.7% 18 1, ,312-3,876 3,745 Bank balances and deposits 5.5% 3,208 9,710 5, ,208 17,689 Others - 7,311 4,945 9, ,312 22,312 11,085 23,227 19,611 7,962-61,885 59,158 Non-derivative financial liabilities Trade and other payables - (7,726) (8,640) (16,366) (16,366) Borrowings - fixed rate 7.15 (36) (72) (321) (7,287) - (7,716) (6,000) - variable rate 8.10 (1,735) (4,825) (22,389) (16,035) (6,898) (51,882) (44,541) Convertible loan notes (248) (4,912) - (5,160) (4,144) Bank overdraft 6.00 (547) (547) (538) Finance lease liability 4.00 (1) (2) (7) (6) - (16) (14) Financial guarantee contracts (10,045) (13,539) (22,965) (28,240) (6,898) (81,687) (71,603) 1,040 9,688 (3,354) (20,278) (6,898) (19,802) (12,445) 153

166 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Liquidity tables - continued Total Total carrying 3 months undiscounted amount Less than to cash as at 1 month 1-3 months 1 year 1-5 years 5+ years flows 31/12/2007 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Derivatives - net settlement Interest rate swaps Foreign exchange forward contracts (5) (21) (17) (17) Derivatives - gross settlement Foreign exchange forward contracts - inflow - 6,054 5, ,131 11,131 - outflow - (5,811) (5,152) - - (10,963) (10,963) (75) Weighted Total average Total carrying effective 3 months undiscounted amount interest Less than to cash as at rate 1 month 1-3 months 1 year 1-5 years 5+ years flows 31/12/2006 % HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Non-derivative financial assets Equity securities - - 5,817 2,233 5,859-13,909 12,772 Debt securities 6.7% 20 1,165 1,030 1,818-4,033 3,886 Bank balances and deposits 5.0% 2,988 8,440 3, ,101 14,656 Others - 5,050 4,772 9, ,004 19,004 8,058 20,194 16,118 7,677-52,047 50,318 Non-derivative financial liabilities Trade and other payables - (8,726) (8,089) (4,408) - - (21,223) (21,223) Borrowings - fixed rate 8.10 (14) (28) (120) (2,324) - (2,486) (2,000) - variable rate 8.20 (7,701) (5,409) (17,389) (30,517) (6,850) (67,866) (54,881) Bank overdraft 6.00 (392) (392) (378) Finance lease liability 4.50 (5) (10) (43) (44) - (102) (89) Financial guarantee contracts (16,838) (13,536) (17,960) (32,885) (6,850) (92,069) (78,571) (8,780) 6,658 (1,842) (25,208) (6,805) (40,022) (28,253) 154

167 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Liquidity tables - continued Total Total carrying 3 months undiscounted amount Less than to cash as at 1 month 1-3 months 1 year 1-5 years 5+ years flows 31/12/2006 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ Derivatives - net settlement Interest rate swaps Foreign exchange forward contracts (10) (15) (9) - - (34) (34) 2 (10) Derivatives - gross settlement Foreign exchange forward contracts inflow - 3,423 5, ,739 8,739 - outflow - (3,240) (5,245) - - (8,485) (8,485) At the year end it was not probable that the counterparty to the financial guarantee contract will claim under the contract. Consequently, the carrying amount of financial guarantee contract of HK$6,000 (2006: HK$18,000) has not been presented above Fair value of financial instruments HKFRS 7.27 The fair value of financial assets and financial liabilities are determined as follows: the fair value of financial assets and financial liabilities (including derivative instruments) with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices and ask prices respectively; and the fair value of other financial assets and financial liabilities (including derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices or rates from observable current market transactions as input. For an option-based derivative, the fair value is estimated using option pricing model (for example, the binomial model). HKFRS 7.25 HKFRS 7.29 Except as detailed in the following table, the directors consider that the carrying amounts of financial assets and financial liabilities recorded in the consolidated financial statements approximate their fair values: Carrying Carrying amount Fair value amount Fair value HK$ 000 HK$ 000 HK$ 000 HK$ 000 Financial assets Held-to-maturity investments: Debt securities 6,863 6,880 5,262 5,273 Finance lease receivables 1,028 1, Financial liabilities Convertible loan notes 4,144 4, Obligations under finance leases Fixed-rate borrowings 6,015 6,023 2,003 2,

168 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS Acquisition of subsidiaries HKFRS 3.67 On 28 July 2007, the Group acquired 100% of the issued share capital of Subsix Limited and Subseven Limited for considerations of HK$430,000 and HK$792,000 respectively. The amount of goodwill arising as a result of the acquisition was HK$435,000 in aggregate. The net assets acquired in the transaction and the goodwill arising are as follows: HKFRS 3.67 Subsix Limited Subseven Limited Acquiree s Acquiree s carrying carrying amount amount Total before Fair value Fair before Fair value Fair Fair combination adjustment value combination adjustment value value HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Net assets acquired: Bank balances and cash Trade and other receivables Inventories In-process R&D Plant and equipment Trade and other payables (23) - (23) (35) - (35) (58) Deferred tax liabilities (2) (2) (4) - (9) (9) (13) Contingent liabilities - (45) (45) (45) 312 (12) Goodwill 435 1,222 HKFRS 3.67 HKAS 7.40 Total consideration satisfied by: Cash 822 Freehold land and buildings 400 Net cash outflow arising on acquisition: 1,222 Cash consideration paid (822) Bank balances and cash acquired 200 (622) HKFRS 3.67 Goodwill arose in the business combination because the cost of the combination included a control premium paid to acquire Subsix Limited. In addition, the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce of Subsix Limited. These benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be reliably measured. 156

169 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 3.67 HKFRS 3.70 Subsix Limited and Subseven Limited contributed HK$35,000 and HK$13,000 to the Group s profit for the period between the date of acquisition and the balance sheet date respectively. If the acquisition had been completed on 1 January 2007, total group revenue for the year would have been HK$263.5 million, and profit for the year would have been HK$ million. The proforma information is for illustrative purposes only and is not necessarily an indication of revenue and results of the Group that actually would have been achieved had the acquisition been completed on 1 January 2007, nor is it intended to be a projection of future results. 157

170 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 48. Disposal of a subsidiary HKFRS 5.41 The Group discontinued its bicycle business operations at the time of disposal of its subsidiary, Sub A Ltd. The net assets of Sub A Ltd. at the date of disposal were as follows: 2007 HK$ 000 HKAS 7.40(d) HKAS 7.40(c) Net assets disposed of: Property, plant and equipment 5,662 Inventories 2,765 Trade and other receivables 1,074 Bank balances and cash 288 Trade and other payables (918) Borrowings (4,342) Deferred tax liabilities (615) 3,914 Attributable goodwill 3,080 Release of translation reserve (120) HKAS 7.40 HKAS ,874 Gain on disposal 1,940 Total consideration 8,814 Satisfied by: Cash 7,854 Deferred consideration (note 34) 960 8,814 HKAS 7.42 Net cash inflow arising on disposal: Cash consideration 7,854 Bank balances and cash disposed of (288) 7,566 The impact of Sub A Limited on the Group s results and cash flows in the current and prior periods is disclosed in note

171 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 49. Cash and cash equivalents HKAS 7.45 For the purposes of the cash flow statement, cash and cash equivalents include cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cash flow statement can be reconciled to the related items in the consolidated balance sheet as follows: HK$ 000 HK$ 000 Bank balances and cash 18,199 17,778 Bank overdrafts (538) (378) 17,661 17,400 Cash and cash equivalents included in a disposal group held for sale (note 12) Non-cash transactions 17,836 17,400 HKAS 7.43 During the year ended 31 December 2007, the Group disposed of property, plant and equipment with an aggregate fair value of HK$0.4 million to acquire the subsidiaries indicated in note 47. This disposal is not reflected in the consolidated cash flow statement. During the year ended 31 December 2007, the Group acquired an equipment amounted to HK$40,000 under a finance lease. 159

172 Hong Kong GAAP Limited HKAS Sch 10:12(5) Notes to the consolidated financial statements for the year ended 31 December continued 51. Contingent liabilities and contingent assets Contingent liabilities HK$ 000 HK$ 000 Court proceedings (Note 1) - - HKAS Contingent liabilities incurred by the Group arising from interests in joint ventures (Note 2) Financial guarantees given to banks (Note 3) 970 1,050 Contingent assets HKAS Faulty goods claim (Note 4) Notes: 1) A subsidiary of the Group is a defendant in a legal action involving the alleged failure of the subsidiary to supply goods in accordance with the terms of contract. The directors believe, based on legal advice, that the action can be successfully defended and therefore no losses (including claims for costs) will be incurred. The legal claim is expected to be settled in the course of the next eighteen months. 2) A number of contingent liabilities have arisen as a result of the Group s interests in joint ventures. The amount disclosed represents the aggregate amount of such contingent liabilities for which the Group as an investor is liable. The extent to which an outflow of funds will be required is dependent on the future operations of the joint ventures being more or less favourable than currently expected. The Group is not contingently liable for the liabilities of other venturers in its joint ventures. 3) This represents the aggregate amounts that could be required to be paid if the guarantees were called upon in entirety, of which HK$0.5 million (2006: HK$0.55 million) has been utilised by the bank's borrowers. As at balance sheet date, an amount of HK$30,000 (2006: HK$50,000) has been recognised in the consolidated balance sheet as liabilities. 4) A subsidiary of the Group has a claim outstanding against a supplier for the supply of faulty products. Based on negotiations to date the directors believe that it is probable that their claim will be successful and that compensation of HK$0.14 million will be recovered. 160

173 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 52. Operating leases The Group as lessee HK$ 000 HK$ 000 HKAS 17.35(c) Sch 10:13(1)(i) Minimum lease payments paid under operating leases during the period: Premises 2,008 2,092 Other assets [describe] - - 2,008 2,092 HKAS At the balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows: HK$ 000 HK$ 000 Within one year 1,734 1,908 In the second to fifth years inclusive 3,568 4,336 Over five years 1,618 2,526 6,920 8,770 HKAS 17.35(d) Operating leases relate to warehouse facilities with lease terms of between 3 to 7 years (2006: 2 to 7 years), with an option to extend for a further 3 years. All operating lease contracts contain market review clauses in the event that the Group exercises its option to renew. The Group does not have an option to purchase the leased asset at the expiry of the lease period. The Group as lessor HKAS 17.56(c) HKAS Property rental income earned during the year was HK$20,000 (2006: HK$16,000). All of the Group s investment properties are held for rental purposes. They are expected to generate rental yields of 10% on an ongoing basis. All of the properties held have committed tenants for the next 4 years. At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments: HK$ 000 HK$ 000 Within one year In the second to fifth year inclusive After five years

174 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 53. Commitments HKAS 16.74(c) Sch 10:12(6) HKAS 40.75(h) HK$ 000 HK$ 000 Commitments for the acquisition of property, plant and equipment 4,856 6,010 In addition, the Group has entered into a contract for the management and maintenance of its investment properties for the next 5 years, which will give rise to an annual charge of HK$3,500 (2006: HK$3,250). 54. Pledged of assets Assets with the following carrying amounts have been pledged to secure borrowings of the Group (see note 39): HK$ 000 HK$ 000 HKAS HKFRS 7.14 HKFRS 7.14 Freehold land and buildings 21,054 25,851 Investment properties Trade receivables Bank deposits 2,000 2,000 24,136 27,983 In addition, the Group s obligations under finance leases (see note 40) are secured by the lessors title to the leased assets, which have a carrying amount of HK$18,000 (2006: HK$36,000). 162

175 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 55. Share-based payment transactions THE COMPANY HKFRS 2.45 LR GR The Company s share option scheme (the Scheme ), was adopted pursuant to a resolution passed on 28 November 2000 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 27 November Under the Scheme, the Board of Directors of the Company may grant options to eligible employees, including directors of the Company and its subsidiaries, to subscribe for shares in the Company. At 31 December 2007, the number of shares in respect of which options had been granted and remained outstanding under the Scheme was 196,000 (2006: 290,000), representing 1.1% (2006: 1.3%) of the shares of the Company in issue at that date. The total number of shares in respect of which options may be granted under the Scheme is not permitted to exceed 10% of the shares of the Company in issue at any point in time, without prior approval from the Company s shareholders. The number of shares issued and to be issued in respect of which options granted and may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company s shareholders. Options granted to independent non-executive directors in excess of 0.1% of the Company s share capital or with a value in excess of HK$5 million must be approved in advance by the Company s shareholders. No consideration is payable on the grant of an option. Options may be exercised at any time from the date of grant of the share option to the second anniversary of the date of grant. The exercise price is determined by the directors of the Company, and will not be less than the higher of (i) the closing price of the Company s shares on the date of grant; (ii) the average closing price of the shares for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Company s shares. HKFRS 2.45(d) Details of specific categories of options are as follows: Date Exercise Exercise Fair value at Option type of grant period price grant date HK$ HK$ 2006A 31/03/06 31/03/06 to 30/03/ B 30/09/06 30/09/06 t0 29/09/ /03/07 31/03/07 to 30/03/ HKFRS 2.46, 47 LR GR In accordance with the terms of the share-based arrangement, options issued during the financial year ended 31 December 2006, and 31 December 2007, vest at the date of grant. The fair value of the share options granted during the financial year is HK$0.94 (2006: HK$1.17) each. Options were priced using a binomial option pricing model. Where relevant, the expected life used in the model has been adjusted based on management s best estimate for the effects of nontransferability, exercise restrictions (including the probability of meeting market conditions attached to the option), and behavioural considerations. Expected volatility is based on the historical share price volatility over the past 5 years. To allow for the effects of early exercise, it was assumed that executives and senior employees would exercise the options after vesting date when the share price was two and a half times the exercise price. 163

176 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued Inputs into the model Option type 2006A 2006B 2007 Grant date share price Exercise price Expected volatility 70.20% 70.40% 56.10% Option life 2 years 2 years 2 years Dividend yield 13.27% 13.12% 13.00% Risk-free interest rate 5.13% 5.14% 5.50% Other [describe] HKFRS 2.47 LR Note 4 GR Note 4 HKFRS 2.45 LR GR Expected volatility was determined by using the historical volatility of the Company s share price over the previous two years. The Binomial model has been used to estimate the fair value of the options. The variables and assumptions used in computing the fair value of the share options are based on the directors best estimate. The value of an option varies with different variables of certain subjective assumptions. The following table discloses movements of the Company s share options held by employees and directors during the year. Outstanding Granted Exercised Forfeited Expired Outstanding Option at during during during during at type 1/1/2007 year year year year 31/12/ A 140,000 - (140,000) B 150,000 - (150,000) ,000 (24,000) , , ,000 (314,000) ,000 Exercisable at the end of the year 196,000 Exercise price HK$1 HK$1 HK$1 - - HK$1 The following table discloses movements of the Company s share options held by employees and directors during prior year: Outstanding Granted Exercised Forfeited Expired Outstanding Option at during during during during at type 1/1/2006 year year year year 31/12/ A - 140, , B - 150, , , ,000 Exercisable at the end of the year 290,000 Exercise price - HK$ HK$1 164

177 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKFRS 2.45(c) LR GR The following share options granted under the employee share option plan were exercised during the financial year: Number Share price at Options type exercised Exercise date exercise date HK$ 2006A 30,000 05/01/ A 45,000 31/01/ A 65,000 15/03/ B 65,000 03/07/ B 85,000 28/08/ ,000 20/12/ THE SUBSIDIARY 314,000 HKFRS 2.45 LR GR A subsidiary of the Company, Kowloon Limited (the Subsidiary ) also operates a share option scheme (the Subsidiary s Scheme ). The Subsidiary s Scheme was adopted pursuant to a resolution passed on 17 May 2001 for the primary purpose of providing incentives to directors and eligible employees of the Subsidiary, and will expire on 16 May Under the Subsidiary s Scheme, the board of directors of the Subsidiary may grant options to eligible employees, including directors of the Subsidiary, to subscribe for shares in the Subsidiary. At 31 December 2007, the number of shares in respect of which options had been granted and remained outstanding under the Subsidiary s Scheme was 746,000 (2006: nil), representing 4% (2006: nil) of the shares of the Subsidiary in issue at that date. The total number of shares in respect of which options may be granted under the Subsidiary s Scheme is not permitted to exceed 10% of the shares of the Subsidiary in issue at any point in time, without prior approval from the Subsidiary s shareholders. The number of shares issued and to be issued in respect of which options granted and may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Subsidiary in issue at any point in time, without prior approval from the Subsidiary s shareholders. Options granted to independent non-executive directors of the Subsidiary in excess of 0.1% of the Subsidiary s share capital or with a value in excess of HK$ 5 million must be approved in advance by the Subsidiary s shareholders. No consideration is payable on the grant of an option. Options may be exercised at any time from the date of grant of the share option to the second anniversary of the date of grant. The exercise price is determined by the directors of the Subsidiary, and will not be less than the higher of (i) the closing price of the Subsidiary s shares on the date of grant; (ii) the average closing price of the shares for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Subsidiary s share. HKFRS 2.45(d) Details of the options are as follows: Date Exercise Exercise Fair value at Option type of grant period price grant date HK$ HK$ /04/06 01/04/06 to 30/03/ HKFRS 2.46, 47 LR GR In accordance with the terms of the Subsidiary s share-based arrangement, options issued during the year ended 31 December 2006 vest at the date of grant. 165

178 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued The fair value of the share options granted for the financial year ended 31 December 2006 is HK$0.67 each. Options were priced using the binomial option pricing model. Where relevant, the expected life used in the model has been adjusted based on management s best estimate for the effects of non-transferability, exercise restrictions (including the probability of meeting market conditions attached to the option), and behavioural considerations. Expected volatility is based on the historical share price volatility over the past 5 years. Inputs into the model Option type 2006 Grant date share price 1.32 Exercise price 1.20 Expected volatility 60.70% Option life 2 years Dividend yield 2.38% Risk-free interest rate 5.25% Other [describe] - LR Note 4 GR Note 4 HKFRS 2.45 LR GR The binomial model has been used to estimate the fair value of the options. The variables and assumptions used in computing the fair value of the share options are based on the directors best estimate. The value of an option varies with different variables of certain subjective assumptions. The following table discloses movements of the Subsidiary s share options held by employees and directors of the Subsidiary during the year: Outstanding Granted Exercised Forfeited Expired Outstanding Option at during during during during at type 1/1/2007 year year year year 31/12/ , ,000 Exercisable at the end of the year 746,000 Exercise price HK$ HK$1.20 The following table discloses movements of the Subsidiary s share options held by employees and directors of the Subsidiary during the year: Outstanding Granted Exercised Forfeited Expired Outstanding Option at during during during during at type 1/1/2006 year year year year 31/12/ , ,000 Exercisable at the end of the year 746,000 Exercise price - HK$ HK$1.20 HKFRS 2.51 HKFRS 2.50 The Group recognised the total expense of HK$206,000 for the year ended 31 December 2007 (2006: HK$838,000), comprising HK$206,000 (2006: HK$338,000) and nil (2006: HK$500,000) in relation to share options granted by the Company and the Subsidiary respectively. 166

179 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 56. Retirement benefit plans Defined contribution plan App 16.26(1),(2) GR 18.34(1),(2) The Group operates a Mandatory Provident Fund Scheme for all qualifying employees in Hong Kong. The assets of the plans are held separately from those of the Group in funds under the control of trustees. The employees of the Group s subsidiary in the PRC are members of a state-managed retirement benefit plan operated by the government of the PRC. The subsidiary is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit plan is to make the specified contributions. HKAS The total expense recognised in the consolidated income statement of HK$160,000 (2006: HK$148,000) represents contributions payable to these plans by the Group at rates specified in the rules of the plans. As at 31 December 2007, contributions of HK$8,000 (2006: HK$2,000) due in respect of the year ended 31 December 2007 had not been paid over to the plans. The amounts were paid over subsequent to the balance sheet date. Defined benefit plan HKAS A App 16.26(1),(2) GR 18.34(1),(2) App 16.26(5) GR 18.34(5) HKAS A(n) The Group operates funded defined benefit plans for qualifying employees of its subsidiaries in Malaysia. Under the plans, the employees are entitled to retirement benefits varying between 40% and 45% of final salary on attainment of a retirement age of 65. No other post-retirement benefits are provided to these employees. The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out at 31 December 2007 by Mr. F.G. Ho, Fellow of the Institute of Actuaries of A Land. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method. The principal assumptions used for the purposes of the actuarial valuations were as follows: % % Discount rate Expected return on plan assets Expected rate of salary increase Expected return on reimbursement rights - - Other [describe] - - App 16.25(5) GR 18.34(5) The actuarial valuation showed that the market value of plan assets was HK$4.2 million (2006: HK$4.3 million) and that the actuarial value of these assets represented 71% (2006: 75%) of the benefits that had accrued to members. The shortfall of HK$1.7 million (2006: HK$1.5 million) is to be cleared over the estimated remaining service period of 15 years. 167

180 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS A(g) Amounts recognised in profit or loss in respect of these defined benefit plans are as follows: HK$ 000 HK$ 000 Current service cost Interest on obligation Expected return on plan assets (276) (249) Expected return on reimbursement rights - - Actuarial losses recognised in the year Past service cost - - Losses (gains) arising from curtailments or settlements - - Adjustments for restrictions on the defined benefit asset HKAS A(g) HKAS A(f) The charge for the year amounted to HK$586,000 (2006: HK$556,000) is included in the employee benefits expense in the consolidated income statement. Of the charge for the year, HK$412,000 (2006: HK$402,000) has been included in cost of sales and the remainder in administrative expenses. The amount included in the balance sheet arising from the Group s obligation in respect of its defined benefit plans is as follows: HK$ 000 HK$ 000 HKAS A(d) HKAS A(d) Present value of funded defined benefit obligation 5,905 5,808 Fair value of plan assets (4,202) (4,326) 1,703 1,482 Present value of unfunded defined benefit obligation - - Deficit 1,703 1,482 Net actuarial gains and losses not recognised (873) (1,098) Past service cost not yet recognised (322) (32) Restrictions on asset recognised - - Fair value of reimbursement rights recognised as an asset - - Other [describe] - - Net liability arising from defined benefit obligation

181 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS A(c) Movements in the present value of the defined benefit obligations in the current year were as follows: HK$ 000 HK$ 000 At 1 January 5,808 5,814 Current service cost Interest cost Contributions from plan participants - - Actuarial losses Past service cost - - Losses/(gains) on curtailments - - Liabilities extinguished on settlements - - Liabilities assumed in a business combination - - Exchange differences on foreign plans - - Benefits paid (760) (720) Other [describe] - - At 31 December 5,905 5,808 HKAS A(e) Movements in the fair value of the plan assets in the current period were as follows: HK$ 000 HK$ 000 At 1 January 4,326 4,788 Expected return on plan assets Actuarial gains(losses) 220 (91) Exchange differences on foreign plans - - Contributions from the employer Contributions from plan participants - - Benefits paid (760) (720) Assets acquired in a business combination - - Assets distributed on settlements - - Other [describe] - - At 31 December 4,202 4,

182 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS A (j),(l) The major categories of plan assets, and the expected rate of return at the balance sheet date for each category, are as follows: Expected return Fair value of plan assets /12/ /12/2006 % % HK$ 000 HK$ 000 Equity instruments , Debt instruments ,980 1,850 Property ,196 1,490 Other [describe] Weighted average expected return ,202 4,326 HKAS A(l) HKAS A(m) HKAS A(k) HKAS A(p) The overall expected rate of return is a weighted average of the expected returns of the various categories of plan assets held. The directors assessment of the expected return is based on historical return trends and analysts predictions of the market for the asset in the next twelve months. The actual return on plan assets was HK$0.72 million (2006: HK$0.354 million). The plan assets include ordinary shares of the Company with a fair value of HK$0.380 million (2006: HK$0.252 million) and property occupied by a subsidiary of Hong Kong GAAP Limited with a fair value of HK$0.622 million (2006: HK$0.620 million). The history of experience adjustments is as follows: HK$ 000 HK$ 000 HK$ 000 HK$ 000 Present value of defined benefit obligation 5,905 5,808 4,672 4,113 Fair value of plan assets (4,202) (4,326) (4,400) (3,298) Deficit 1,703 1, Experience adjustments on plan liabilities Experience adjustments on plan assets 220 (91) HKAS A(q) The Group expects to make a contribution of HK$0.44 million (2006: HK$0.44 million) to the defined benefit plans during the next financial year. 170

183 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 57. Related party transactions HKAS 24.4 HKAS 24.17,18 During the year, the Group entered into the following transactions with related parties: Amounts due from Amounts due to Trade sales Trade purchases related parties related parties HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Fellow subsidiaries Holding company 1, Associates The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No expense has been recognised in the period for bad or doubtful debts in respect of the amounts due from related parties. Loans from / to related parties HK$ 000 HK$ 000 Loan to associates (note 32) 2,981 2,981 Amount due from directors (note 33) ,637 3,088 Loans from fellow subsidiaries (note 39) 12,917 34,124 In addition to the above, the Group has entered into the following related party transactions with companies controlled by Mr. Gary D.K Wong, a director of the Company: 1) the Group received certain consultancy services, for which a management fee of HK$240,000 (2006: HK$240,000) was charged; and 2) the Group acquired a property in Shatin at a consideration of HK$ 1 million. 171

184 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued HKAS Compensation of key management personnel The remuneration of directors and other members of key management during the year was as follows: HK$ 000 HK$ 000 Short-term benefits 2,368 2,027 Post-employment benefits Other long-term benefits Share-based payments ,711 2,557 The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends. s128(1),(2) App 16.9(1),(2) 58. Particulars of principal subsidiaries of the Company GR 18.10(1),(2) Place/ Proportion country of Proportion of voting incorporation Paid up/ ownership power held Name of or registration Class of registered interest held by the Principal subsidiary /operations share held share capital by the Company Company activities Directly Indirectly % % % % % % Kowloon Limited Hong Kong Ordinary HK$50,000, Manufacture and sale of widgets Subone Limited PRC Registered RMB5,000, Manufacture and sale of toys Subtwo Limited Malaysia Ordinary USD1, Manufacture and sales of widgets Subthree Limited Hong Kong Ordinary HK$ Construction Subfour Limited British Virgin Ordinary USD Investment Island holding Subsix Limited Singapore Ordinary USD5, e-business solutions Subseven Limited PRC Registered RMB10,000, e-business solutions Sub A Limited Hong Kong Ordinary HK$ Manufacture of bicycle s128(4)&(5) App 16 Note 9.2 GR The above table lists the subsidiaries of the Group which, in the opinion of the directors, principally affected the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length. Subone Limited and Subseven Limited are wholly foreign owned enterprises. 172

185 Hong Kong GAAP Limited Notes to the consolidated financial statements for the year ended 31 December continued 59. Balance sheet information of the Company Balance sheet information of the Company at the balance sheet date includes: HK$ 000 HK$ 000 Unlisted investments in subsidiaries 188, ,030 Bank balances and cash 6,000 4,000 Other current assets 4,337 3,210 Total assets 198, ,240 Share capital (note 42) 17,819 23,005 Reserves 180, ,235 Total equity 198, ,240 Note: Section 123(1) and 126(1) of the Companies Ordinance state that both the company s balance sheet and the consolidated balance sheet of a company incorporated in Hong Kong must give a true and fair view. In order to comply with the requirements of the Hong Kong Companies Ordinance, a Hong Kong incorporated company may present the company s balance sheet as a primary statement (together with all relevant notes) within the consolidated financial statements. HKAS HKAS Post balance sheet events On 18 January 2008, the premises of Subfive Limited were seriously damaged by fire. Insurance claims are in process, but the cost of refurbishment is currently expected to exceed the amount that will be reimbursed by HK$8.3 million. 173

186 Hong Kong GAAP Limited App GR Financial summary RESULTS For the year ended 31 December HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Revenue 146, , , , ,918 Cost of sales (90,505) (73,634) (75,706) (91,840) (87,899) Gross profit 56,399 45,041 50,143 60,000 53,019 Investment and other income ,626 3,330 4,339 Other gains and losses 896 1,620 1, Distribution and selling expenses (4,891) (3,214) (4,216) (4,600) (5,087) Administrative expenses (13,246) (12,160) (14,032) (19,572) (16,422) Share of profits of associates ,589 1,186 Finance costs (4,321) (3,610) (2,480) (6,023) (5,034) Other expenses (1,230) (896) (1,645) (2,612) (2,656) Profit before tax 34,299 27,565 30,827 32,138 29,548 Income tax expense (12,432) (10,121) (11,201) (11,801) (11,306) Profit for the year from continuing operations 21,867 17,444 19,626 20,337 18,242 Profit for the year from discontinued operations ,995 8,310 21,867 17,444 19,626 30,332 26,552 Attributable to: Equity holders of the Company 21,841 17,390 19,529 27,569 22,552 Minority interests ,763 4,000 21,867 17,444 19,626 30,332 26,552 Earnings per share Basic (HK cents) Diluted (HK cents)

187 Hong Kong GAAP Limited Financial Summary-continued As at 31 December HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 ASSETS AND LIABILITIES Total Assets 216, , , , ,458 Total Liabilities (91,001) (75,865) (86,214) (94,090) (91,418) 125, , , , ,040 Equity attributable to equity holders of the Company 115, , , , ,035 Share options reserve of a subsidiary Minority interests 10,525 9,671 10,611 19,505 23, , , , , ,

188 App GR Hong Kong GAAP Limited PARTICULARS OF MAJOR INVESTMENT PROPERTIES AT 31 DECEMBER 2007 PROPERTIES HELD FOR INVESTMENT Location Type Lease Term Carpark Lot 21, Carpark Medium-term Lease XYZ Plaza, 10 XYZ Road, Hong Kong Flat 1402, Commercial Medium-term Lease Dragon Garden 21 Flying Road, Hong Kong 176

189 Presentation and Disclosure checklist

190

191 Presentation and Disclosure Checklist Contents Page Section 1 Directors report 178 Section 2 Independent auditor s report 180 Section 3 General principles of presentation 183 Section 4 Income statement 187 Section 5 Balance sheet 188 Section 6 Statement of changes in equity 192 Section 7 Cash flow statement 194 Section 8 Accounting policies 197 Section 9 Explanatory notes 203 Section 10 Accounting and reporting by retirement benefit plans (HKAS 26) 263 Section 11 Financial reporting in hyperinflationary economies (HKAS 29) 267 Section 12 Agriculture (HKAS 41) 268 Section 13 First-time adoption of HKFRSs (HKFRS 1) 271 Section 14 Insurance contracts (HKFRS 4) 275 Section 15 Exploration for and evaluation of mineral resources (HKFRS 6) 278 Section 16 Additional matters for listed entities

192 Section 1 Directors report s129d(1) Presentation/Disclosure Requirement A report by the directors with respect to the profit or loss of the company for the financial year, and the state of the company s affairs at the end thereof, should be attached to every balance sheet laid before a company in a general meeting. Principal activities s129d(3) The report should state the principal activities of the company and of its subsidiaries in the course of the financial year and any significant change in those activities in the year. Appropriations s129d(3) s129d(3)(c) The report should state the amount, if any, which the directors recommend should be paid by way of dividend. The report should state the amount, if any, which the directors propose to be carried to reserves. Donations s129d(3)(d)&(e) If the company (or, in the case of a group, the company taken together with its subsidiaries) has made donations for charitable or other purposes, the total amount of those donations should be disclosed. Notes: 1. A company, which is a wholly-owned subsidiary of a company incorporated in Hong Kong, needs not disclose donations made. 2. For a company which is not itself a wholly-owned subsidiary of a company incorporated in Hong Kong, and which has subsidiaries, disclosure is required if the company and its subsidiaries between them have made donations for charitable or other purposes of HK$1,000 or more. 3. For a company which is not itself a wholly-owned subsidiary of a company incorporated in Hong Kong, and which has no subsidiary, disclosure is required if the company has made donations for charitable or other purposes of HK$10,000 or more. Fixed assets s129d(3)(f) If significant changes in the fixed assets of the company or any of its subsidiaries have occurred during the financial year, the report should give details of those changes. Share capital and debentures s129d(3)(g) s129d(3)(h) If, in the financial year, the company has issued any shares, the report should state the reason for making the issue, the classes of shares issued and, as respects each class of shares, the number issued and the consideration received by the company for the issue. If, in the financial year, the company has issued any debentures, the report should state the reason for making the issue, the classes of debentures issued and, as respects each class of debentures, the amount issued and the consideration received by the company for the issue. Directors information s129d(3)(i) The report should state the names of any persons who were directors of the company at any time during the financial year. 178

193 Presentation/Disclosure Requirement Directors interests in contracts s129d(3)(j) The report should disclose details of the interests, whether direct or indirect, of directors in contracts with the company or any of the company s subsidiaries or holding companies or fellow subsidiaries, at any time during the year, including: (c) (d) a statement of the contract s existence, or of its having existed; the names of the parties thereto (other than the company); the name of the interested director, if not a party to the contract; and the nature of the contract and the director s interest therein. Notes: s162(1)&(4) 1. It is only applicable if the contract is significant to the company s business and the director s interest is material. s129d(6) 2. It is not applicable to directors service contracts or contracts between the company and another company where the director s only interest is by virtue of being a director of that other company. Directors rights to acquire shares s129d(3)(k) The report should disclose details of directors rights to acquire shares or debentures, in the company or any other body corporate, under any arrangement to which the company or the company s subsidiary or holding company or fellow subsidiary is a party, explaining the effect of the arrangement and giving the names of all persons involved as directors during the year. Management/administration contracts s162a(1) s129d(3)(ia) Where the company enters into any contract, other than a contract of service with any director or any person engaged in full-time employment of the company, whereby any individual, firm or body corporate undertakes the management and administration of the whole or any substantial part of the company s business, a statement should be presented of the existence and duration of the contract and the name of any director interested therein for any year the contract is in force. General s129d(3)(l) s129e Any other matters material for the appreciation of the state of the company s affairs by its members should be disclosed (provided that it is not harmful to the business of the company or any of its subsidiaries). Where advantage is taken of section 141C to show an item in the directors report instead of in the financial statements, the directors report should also disclose the corresponding amount for the immediately preceding financial year, except where that amount would not have had to be shown had the item been shown in the financial statements. Note: Section 141C permits that any information that is required by the Companies Ordinance to be given in financial statements may be given in the directors report instead of in the financial statements. Approval of the directors report s129d(2) The directors report should be approved by the board of directors and signed on behalf of the board either by the chairman of the meeting at which it was approved or by the company secretary. 179

194 Section 2 Independent auditor s report s141(3) Presentation/Disclosure Requirement The auditor is required to state in their report whether, in their opinion, a true and fair view is given: (c) Note: in the balance sheet, of the state of the company s affairs at the end of the accounting period; in the profit and loss account (if not framed as a consolidated profit and loss account), of the company s profit or loss for the accounting period; in the case of group financial statements, of the state of affairs and profit or loss of the company and its subsidiaries dealt with by those financial statements. HKAS 7 Cash Flow Statements requires that financial statements should include a cash flow statement. In addition, HKAS 1 Presentation of Financial Statements requires the inclusion of a statement of changes in equity/statement of recognised income and expense. Where the auditor forms a negative opinion on any of the following, that fact should be stated: s141(4) whether proper books of account have been kept and proper returns adequate for the audit have been received from branches not visited by them; s141(4) whether the company s balance sheet and (unless it is framed as a consolidated profit and loss account) profit and loss account are in agreement with the books of account and returns; s141(6) (c) whether they have received all the information and explanations necessary for the purposes of the audit; and HKSA 720(18-1) (d) whether the information given in the Directors Report and other information accompanying the financial statements is consistent with the financial statements. HKSA 700(18) HKSA 700(20) The auditor s report should have a title that clearly indicates that it is the report of an independent auditor. The auditor s report should be addressed as required by the circumstances of the engagement. Note: Ordinarily, the auditor s report on general purpose financial statements is addressed to those for whom the report is prepared, often either to the shareholders or to those charged with governance of the entity whose financial statements are being audited. HKSA 700(22) The introductory paragraph in the auditor s report should identify the entity whose financial statements have been audited and should state that the financial statements have been audited. The introductory paragraph should also: (c) identify the title of each of the financial statements that comprise the complete set of financial statements; refer to the summary of significant accounting policies and other explanatory notes; and specify the date and period covered by the financial statements. 180

195 HKSA 700(28) Presentation/Disclosure Requirement The auditor s report should state that management is responsible for the preparation and the fair presentation of the financial statements in accordance with the applicable financial reporting framework and that this responsibility includes: (c) designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Professional Risk Management Bulletin No. 2 HKSA 700(32) HKSA 700(34) HKSA 700(37) Wordings to clarify to whom the auditor is responsible (as a means of managing the risk of inadvertently assuming a duty of care to third parties) should be added. The auditor s report should state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. The auditor s report should state that the audit was conducted in accordance with Hong Kong Standards on Auditing. The auditor s report should also explain that those standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. The auditor s report should describe an audit by stating that: (c) an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements; the procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor should omit the phrase that the auditor s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and an audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements. HKSA 700(38) HKSA 700(39) HKSA 700(40) HKSA 700(41) HKSA 700(48) The auditor s report should state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor s opinion. An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. When expressing an unqualified opinion, the opinion paragraph of the auditor s report should state the auditor s opinion that the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording should be used). When HKFRSs are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion should identify the jurisdiction or country of origin of the financial reporting framework. When the auditor addresses other reporting responsibilities within the auditor s report on the financial statements, these other reporting responsibilities should be addressed in a separate section in the auditor s report that follows the opinion paragraph. 181

196 HKSA 700(50) HKSA 700(52) HKSA 700(57) HKSA 700(58) s161(8) s161b(6) s141c The auditor s report should be signed. Presentation/Disclosure Requirement The auditor should date the report on the financial statements no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements. Sufficient appropriate audit evidence should include evidence that the entity s complete set of financial statements has been prepared and that those with the recognised authority have asserted that they have taken responsibility for them. The report should name the location in the country or jurisdiction where the auditor practices. The auditor s report should be in writing. If the disclosure requirements in respect of loans to officers and directors remuneration are not complied with, it is the duty of the auditor to give the required particulars, so far as they are reasonably able to do so, in their report. Where the company has opted to present information required by the Companies Ordinance in the directors report, rather than in the financial statements, the scope of the independent auditor s report is extended to include such information. 182

197 Section 3 General principles of presentation Presentation/Disclosure Requirement Components of financial statements HKAS 1.8 A complete set of financial statements should include the following components: (c) (d) (e) a balance sheet; an income statement; a statement of changes in equity; a cash flow statement; and notes, comprising a summary of significant accounting policies and other explanatory notes. A true and fair view and compliance with HKFRSs HKAS 1.14 The financial statements should include an explicit and unreserved statement of compliance with HKFRSs in the notes. Notes: HKAS Financial statements should not be described as complying with HKFRSs unless they comply with all of the requirements of each applicable HKFRS. HKAS Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. HKAS 1.13 Financial statements should give a true and fair view of the financial position, financial performance and cash flows of an entity. Notes: HKAS True and fair view requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions of and recognition criteria for assets, liabilities, income and expenses set out in the Framework for the Preparation and Presentation of Financial Statements (the Framework). The application of HKFRSs, with additional disclosure when necessary, is presumed to result in financial statements that give a true and fair view. HKAS In virtually all circumstances, a true and fair view is achieved by compliance with applicable HKFRSs. A true and fair view also requires an entity: (c) to select and apply accounting policies in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which sets out a hierarchy of authoritative guidance that management considers in the absence of a Standard or an Interpretation that specifically applies to an item; to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and to provide additional disclosures when compliance with the specific requirements in HKFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity s financial position and financial performance. HKAS 1.17 HKAS 1.18 In the extremely rare circumstances in which management concludes that compliance with a requirement in a Standard or an Interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework, the entity should depart from that requirement (if the relevant regulatory framework requires, or otherwise would not prohibit, such a departure) and disclose the following information: 183

198 Presentation/Disclosure Requirement the fact that management has concluded that the financial statements give a true and fair view of the entity s financial position, financial performance and cash flows; the fact that it has complied with applicable Standards and Interpretations, except that it has departed from a particular requirement to achieve a true and fair view; (c) (i) the title of the Standard or Interpretation from which the entity has departed; (ii) (iii) (iv) the nature of the departure (including the treatment that the Standard or Interpretation would require); the reason why that treatment would be so misleading in the circumstances; and the treatment adopted; and (d) for each period presented, the financial impact of the departure on each item in the financial statements that would have been reported in complying with the requirement. HKAS 1.19 HKAS 1.21 When the entity has departed from a requirement of a Standard or an Interpretation in a prior period, and that departure affects the amounts recognised in the financial statements for the current period, it should make the disclosures set out in paragraphs 18(c) and 18(d) of HKAS 1 (see above). In the extremely rare circumstances in which management concludes that compliance with a requirement in a Standard or an Interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework (but the relevant regulatory framework prohibits departure from the requirement), the entity, should, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing the following information: (i) the title of the Standard or Interpretation in question; (ii) (iii) the nature of the requirement; the reason why that treatment would be so misleading in the circumstances; and for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to give a true and fair view. Going concern HKAS 1.23 HKAS 1.23 When management is aware, in making its assessment of the entity s ability to continue as a going concern, of any material uncertainties related to events or conditions that may cast significant doubt upon the entity s ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern. Note: Financial statements should be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. Consistency of presentation HKAS 1.27 The presentation and classification of items in the financial statements should be retained from one period to the next, unless: it is apparent, following a significant change in the nature of the operations of the entity or a review of its financial statements, that another presentation or classification would be more appropriate; or a change in presentation is required by a Standard or an Interpretation. 184

199 Presentation/Disclosure Requirement Materiality, aggregation and offsetting HKAS 1.29 HKAS 1.29 HKAS 1.32 HKAS 1.34 HKAS 1.35 Each material class of similar items should be presented separately in the financial statements. Items of a dissimilar nature or function should be presented separately unless they are immaterial. Assets and liabilities, and income and expenses, should not be offset unless required or permitted by a Standard or an Interpretation. When an entity undertakes, in the course of its ordinary activities, transactions that do not generate revenue but that are incidental to its main revenue-generating activities, the results of such transactions should be presented by netting any income with the related expenses arising on the same transaction, when such presentation reflects the substance of the transaction or other event. Gains and losses arising from a group of similar transactions are reported on a net basis (e.g. foreign exchange gains and losses, or gains or losses arising on financial instruments held for trading) unless the gains and losses are material, in which case they are reported separately. Comparative information HKAS 1.36 HKAS 1.36 HKAS 1.38 Except when a Standard or an Interpretation permits or requires otherwise, comparative information should be disclosed in respect of the previous period for all amounts reported in the financial statements. Comparative information should be included in narrative and descriptive information when it is relevant to an understanding of the current period s financial statements. When the presentation or classification of items in the financial statements is amended, comparative amounts should be reclassified unless the reclassification is impracticable. When comparative amounts are reclassified, an entity should disclose: (c) the nature of the reclassification; the amount of each item or class of items that is reclassified; and the reason for the reclassification. HKAS 1.39 When the presentation or classification of items in the financial statements is amended (but the reclassification of comparative amounts is impracticable), the entity should disclose: the reason for not reclassifying the amounts; and the nature of the adjustments that would have been made if the amounts had been reclassified. Structure and content HKAS 1.44 HKAS 1.46 The financial statements should be clearly identified clearly and distinguished from other information in the same published document. Each component of the financial statements should be clearly identified. 185

200 HKAS 1.46 Presentation/Disclosure Requirement The following information should be prominently displayed, and repeated when it is necessary for a proper understanding of the information presented: (c) (d) (e) the name of the reporting entity or other means of identification, and any change in that information from the preceding balance sheet date; whether the financial statements cover the individual entity or a group of entities; the balance sheet date or the period covered by the financial statements, whichever is appropriate to that component of the financial statements; the presentation currency; and the level of rounding used in presenting amounts in the financial statements (e.g. in thousands or millions of units of the presentation currency). HKAS 1.49 When the entity s balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year, the entity should disclose: (c) the period covered by the financial statements; the reason for using a longer or shorter period; and the fact that comparative amounts for the income statement, statement of changes in equity, cash flow statement and related notes are not entirely comparable. Functional currency and presentation currency HKAS HKAS HKAS HKAS When the presentation currency is different from the functional currency of an entity (functional currency of the parent in case of a group), that fact should be stated, together with disclosure of the functional currency and the reason for using a different presentation currency. When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency should be disclosed. When the entity presents its financial statements in a currency that is different from its functional currency, the entity should describe the financial statements as complying with HKFRSs only if they comply with all the requirements of each applicable Standard and Interpretation including the translation method set out in paragraphs 39 and 42 of HKAS 21. When the entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency and the requirements of paragraph 55 of HKAS 21 are not met, it should: (c) clearly identify the information as supplementary information to distinguish it from the information that complies with HKFRSs; disclose the currency in which the supplementary information is displayed; and disclose the entity s functional currency and the method of translation method used to determine the supplementary information. 186

201 Section 4 Income statement Presentation/Disclosure Requirement Contents - general HKAS 1.78 All items of income and expense recognised in a period should be included in profit or loss for the period, unless a Standard or an Interpretation requires otherwise. HKAS 1.81 HKAS HKAS HKFRS 5.33 revenue; As a minimum, the face of the income statement should include line items that present the following amounts: (c) (d) (e) finance costs; share of profit or loss of associates and joint ventures accounted for using the equity method; tax expense; a single amount comprising the total of: (i) (ii) the post-tax profit or loss of discontinued operations; and the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and (f) profit or loss. HKAS 1.82 HKAS The following items should be disclosed on the face of the income statement as allocations of profit or loss for the period: profit or loss attributable to minority interest; and profit or loss attributable to equity holders of the parent. HKAS 1.83 HKAS 1.85 Additional line items, headings and subtotals should be presented on the face of the income statement when such presentation is relevant to an understanding of the entity s financial performance. The entity should not present any items of income and expense as extraordinary items, either on the face of the income statement or in the notes. Analysis of expenses HKAS 1.88 The entity should present an analysis of expenses using a classification based on either the nature of expenses (employee benefits expense, depreciation etc.) or their function within the entity (cost of sales, distribution expenses, administrative expenses etc.), whichever provides information that is reliable and more relevant. HKAS 1.89 Note: Entities are encouraged to present the analysis referred to in paragraph 88 of HKAS 1 (see above) on the face of the income statement. 187

202 Section 5 Balance sheet Presentation/Disclosure Requirement s125(1) Note: Group accounts should include consolidated balance sheet dealing with the state of affairs of a company and all of its subsidiaries. Current/non-current distinction Sch 10: 4(2) HKAS 1.51 Fixed assets, current assets and assets that are neither fixed nor current should be separately identified. The entity should present current and non-current assets, and current and non-current liabilities as separate classifications on the face of its balance sheet except when a presentation based on liquidity provides information that is reliable and is more relevant. HKAS 1.51 Note: When a presentation based on liquidity provides information that is reliable and is more relevant, all assets and liabilities should be presented broadly in order of liquidity. HKAS 1.52 HKAS 1.57 Whichever method of presentation is adopted, for each asset and liability line item that combines amounts expected to be recovered or settled no more than twelve months after the balance sheet date and more than twelve months after the balance sheet date, the entity should disclose the amount expected to be recovered or settled after more than twelve months. An asset should be classified as current when it satisfies any of the following criteria: (c) (d) it is expected to be realised in, or is intended for sale or consumption in, the entity s normal operating cycle; it is held primarily for the purpose of being traded; it is expected to be realised within twelve months after the balance sheet date; or it is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date. HKAS 1.57 HKAS 1.60 All assets, other than those meeting one of the criteria outlined in paragraph 57 of HKAS 1 (see above), should be classified as non-current. A liability should be classified as current when it satisfies any one of the following criteria: (c) (d) it is expected to be settled in the entity s normal operating cycle; or it is held primarily for the purpose of being traded; or it is due to be settled within twelve months after the balance sheet date; or the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. HKAS 1.60 HKAS 1.63 All liabilities, other than those meeting one of the criteria outlined in paragraph 60 of HKAS 1 (see above), should be classified as non-current. The entity classifies its financial liabilities as current when they are due to be settled within twelve months after the balance sheet date, even if: the original term was for a period longer than twelve months; and an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the balance sheet date and before the financial statements are authorised for issue. HKAS 1.64 If the entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the balance sheet date under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. 188

203 HKAS 1.65 HKAS 1.66 Presentation/Disclosure Requirement When the entity breaches an undertaking under a long-term loan agreement on or before the balance sheet date with the effect that the liability becomes payable on demand, the liability is classified as current, even if the lender has agreed, after the balance sheet date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. When the entity breaches an understanding under a long-term loan arrangement on or before the balance sheet date, with the effect that the liability becomes payable on demand, the liability is classified as non-current if the lender agreed by the balance sheet date to provide a period of grace ending at least twelve months after the balance sheet date, within which the entity can rectify the breach and during which the lender cannot demand immediate payment. Contents - general Sch 10: 4(1) HKAS 1.68 The reserves, provisions, liabilities and assets should be classified under headings appropriate to the company s business. As a minimum, the face of the balance sheet should include line items that present the following amounts to the extent that they are not presented in accordance with paragraph 68A of HKAS 1 Presentation of Financial Statements: (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) property, plant and equipment; investment property; intangible assets; financial assets (excluding amounts shown under (e), (h) and (i) below); investments accounted for using the equity method; biological assets; inventories; trade and other receivables; cash and cash equivalents; trade and other payables; provisions; financial liabilities (excluding trade and other payables and provisions); liabilities and assets for current tax; deferred tax liabilities and deferred tax assets; minority interest (presented within equity); and issued capital and reserves attributable to equity holders of the parent. 189

204 Presentation/Disclosure Requirement Notes: HKAS HKAS 1 does not prescribe the order or format in which items are to be presented. HKAS 1 simply provides a list of items that are sufficiently different in nature or function to warrant separate presentation on the face of the balance sheet. HKAS In addition: line items are included when the size, nature or function of an item or aggregation of similar items is such that separate presentation is relevant to an understanding of the entity s financial position; and the descriptions used and the ordering of items or aggregation of similar items may be amended according to the nature of the entity and its transactions, to provide information that is relevant to an understanding of the entity s financial position. HKAS 1.68A HKFRS 5.38 The face of the balance sheet should also include line items that present the following amounts: the non-current assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations; and liabilities included in disposal groups classified as held for sale in accordance with HKFRS 5. HKAS 1.69 HKAS 1.74 Additional line items, headings and subtotals should be presented on the face of the balance sheet when such presentation is relevant to an understanding of the entity s financial position. The entity should disclose, either on the face of the balance sheet or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the entity s operations. Investments in associates HKAS Investments in associates accounted for using the equity method should be classified as noncurrent assets, and the carrying amount of these investments should be separately disclosed. Non-current asset or disposal group classified as held for sale HKFRS 5.38 HKFRS 5.38 HKFRS 5.39 HKFRS 5.40 Assets and liabilities classified as held for sale should not be offset and presented as a single amount. The major classes of assets and liabilities classified as held for sale should be separately disclosed either on the face of the balance sheet or in the notes, except for the case where a disposal group is a newly acquired subsidiary that meets the criteria to be classified as held for sale on acquisition. The entity should not reclassify or re-present amounts presented for non-current assets or for the assets and liabilities of disposal groups classified as held for sale in the balance sheets for prior periods to reflect the classification in the balance sheet date for the latest period presented. Reserves and provisions Sch 10: 6 The aggregate amount of reserves and provisions (other than provisions for depreciation, renewals or diminution in value of assets) should be stated under separate headings. Minority interests HKAS Minority interests should be presented in the consolidated balance sheet within equity, separately from the parent s shareholders equity. 190

205 Presentation/Disclosure Requirement Approval of financial statements HKAS HKAS s129b(1) The entity should disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the entity s owners or others have the power to amend the financial statements after issue, the entity should disclose that fact. The balance sheet should be approved by the board of directors of the company and signed on behalf of the board by two of the directors or, in the case of a private company having only one director, by the sole director. 191

206 Section 6 Statement of changes in equity Presentation/Disclosure Requirement Notes: HKAS A statement of changes in equity may be presented in various ways. One example is a columnar format that reconciles the opening and closing balances of each element within equity. An alternative is to present only the items described in paragraph 96 of HKAS 1 in the statement of changes in equity. Under this approach, items described in paragraph 97 of HKAS 1 are presented in the notes to the financial statements. The alternative formats are illustrated in the Illustrative Financial Statements. HKAS 19.93B 2. If the entity has adopted a policy of recognising all actuarial gains and losses on all of its defined benefit plans outside profit or loss, it can only choose the alternative format i.e. the statement of recognised income and expenses for presentation purposes. HKAS 1.96 The entity should present a statement of changes in equity showing on the face of the statement: (c) (d) profit or loss for the period; each item of income and expense for the period that, as required by other Standards or by Interpretations, is recognised directly in equity, and the total of these items; and total income and expense for the period (calculated as the sum of and, showing separately the total amounts attributable to equity holders of the parent and to minority interest; and for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Sch 10: 7(1) HKAS 1.97 The following items should be presented either on the face of the statement, or in the notes to the financial statements: (c) the amounts of transactions with equity holders acting in their capacity as equity holders, showing separately distributions to equity holders; the balance of retained earnings (i.e. accumulated profit or loss) at the beginning of the period and at the balance sheet date, and the changes during the period; and a reconciliation between the carrying amount of each class of contributed equity and each reserve at the beginning and the end of the period, separately disclosing each change. The following amounts charged or credited directly to equity should be separately disclosed (as required by specific Standards): HKAS 16.77(f) the revaluation surplus that relates to property, plant and equipment, indicating the change for the period and any restrictions on the distribution of the balance to shareholders; HK(IFRIC) - Int 1.6(d) the change in a revaluation surplus of property, plant and equipment arising from a change in the decommissioning liability; HK(IFRIC) - Int 1.6 Note: For assets accounted for using the revaluation model under HKAS 16, a change in the decommissioning liability (which, under the cost model would be added to the carrying amount of the asset) increases or decreases the revaluation surplus or deficit that has previously been recognised for the asset. Such movements are required to be separately disclosed. HKAS (c) the amount of the revaluation surplus that relates to intangible assets at the beginning and end of the period, indicating the changes during the period and any restrictions on the distribution of the balance to shareholders; HKAS (d) net exchange differences classified in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period; 192

207 Presentation/Disclosure Requirement HKAS (e) the investor s share of changes recognised directly in the associate s equity by the investor; HKFRS 5.38 (f) any cumulative income or expense recognised directly in equity relating to a non-current asset (or a disposal group) classified as held for sale; HKAS (g) the amount of transaction costs accounted for as a deduction from equity in the period; HKAS (h) the aggregate current and deferred tax relating to items that are charged or credited to equity; and (i) when a gain or loss on a hedging instrument in a cash flow hedge has been recognised directly in equity: HKFRS 7.23(c) (i) the amount that was so recognised in equity during the period; HKFRS 7.23(d) (ii) the amount that was removed from equity and included in profit or loss for the period, showing the amount included in each line item in the income statement; and HKFRS 7.23(e) (iii) the amount that was removed from equity during the period and included in the initial cost or other carrying amount of a non-financial asset or non-financial liability in a hedged highly probable forecast transaction. HKFRS 7.20(ii) (j) net gains or net losses on available-for-sale financial assets, showing separately the amount recognised directly in equity during the period and the amount removed from equity and recognised in profit or loss for the period. 193

208 Section 7 Cash flow statement Presentation/Disclosure Requirement General HKAS 7.1 The cash flow statement should be presented as an integral part of the financial statements for each period for which financial statements are presented. Classification of cash flows HKAS 7.10 HKAS 7.18 The cash flow statement should report cash flows during the period classified by operating, investing and financing activities. The entity should report cash flows from operating activities using either: the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or the indirect method, whereby profit or loss is adjusted for the effects of transactions of a noncash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. HKAS 7.19 Note: Entities are encouraged to report cash flows from operating activities using the direct method. HKAS 7.21 Major classes of gross cash receipts and gross cash payments arising from investing and financing activities should be separately reported, except to the extent that they are specifically permitted by paragraphs 22 and 24 of HKAS 7 (see below) to be presented on a net basis. Note: The following classes of cash flow may be reported on a net basis: HKAS 7.22 (1) cash flows arising from the following operating, investing or financing activities: cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short; and HKAS 7.24 (2) cash flows arising from each of the following activities of a financial institution: (c) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date; the placement of deposits with and withdrawal of deposits from other financial institutions; and cash advances and loans made to customers and the repayment of those advances and loans. Interest and dividends HKAS 7.31 HKAS 7.32 Cash flows from interest and dividends received and paid should each be disclosed separately. Each should be classified in a consistent manner from period to period as either operating, investing or financing activities. The total amount of interest paid during a period is disclosed in the cash flow statement whether it has been recognised as an expense in the income statement or capitalised in accordance with HKAS 23 Borrowing Costs. 194

209 Presentation/Disclosure Requirement Taxes on income HKAS 7.35 HKAS 7.35 Cash flows arising from taxes on income should be separately disclosed. Cash flows arising from taxes on income should be classified as cash flows from operating activities unless they can be specifically identified with financing or investing activities. HKAS 7.36 Note: When tax cash flows are allocated over more than one class of activity, the total amount of taxes paid should be disclosed. Investments in subsidiaries, associates and joint ventures HKAS 7.37 HKAS 7.38 HKAS 7.38 When an investment in an associate or a subsidiary is accounted for using the equity or cost method, an investor restricts its reporting in the cash flow statement to the cash flows between itself and the investee (e.g. to dividends and advances). The entity that reports its interest in a jointly controlled entity using proportionate consolidation includes in its consolidated cash flow statement, its proportionate share of the jointly controlled entity s cash flows. The entity that reports its interest in a jointly controlled entity using the equity method includes in its cash flow statement the cash flows in respect of its investments in the jointly controlled entity, and distributions and other payments or receipts between it and the jointly controlled entity. Acquisitions and disposals of subsidiaries and other business units HKAS 7.39 HKAS 7.40 The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities. The following information should be disclosed, in aggregate, in respect of both acquisitions and disposals of subsidiaries or other business units during the period: (c) (d) the total purchase or disposal consideration; the portion of the purchase or disposal consideration discharged by means of cash and cash equivalents; the amount of cash and cash equivalents in the subsidiary or business unit acquired or disposed of; and the amount of the assets and liabilities other than cash or cash equivalents in the subsidiary or business unit acquired or disposed of, summarised by each major category. HKAS 7.42 The aggregate amount of the cash paid or received as purchase or sale consideration is reported in the cash flow statement net of cash and cash equivalents acquired or disposed of. Non-cash transactions HKAS 7.43 HKAS 7.43 Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from the cash flow statement. Investing and financing transactions that do not require the use of cash or cash equivalents should be disclosed elsewhere in the financial statements in a way that provides all of the relevant information about these investing and financing activities. 195

210 Presentation/Disclosure Requirement Components of cash and cash equivalents HKAS 7.45 HKAS 7.46 HKAS 7.45 HKAS 7.47 The components of cash and cash equivalents should be disclosed. The entity should disclose the policy that it adopts in determining the composition of cash and cash equivalents in order to comply with HKAS 1 Presentation of Financial Statements. A reconciliation should be presented of the amounts of the components of cash and cash equivalents in the cash flow statement with the equivalent items reported in the balance sheet. The effect of any change in the policy for determining components of cash and cash equivalents (e.g. a change in the classification of financial instruments previously considered to be part of an entity s investment portfolio), is reported in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Other disclosures HKAS 7.48 HKAS 7.50 HKAS 7.28 The entity should disclose the amount of significant cash and cash equivalent balances held by the entity, which are not available for use by the group, together with a commentary by management. The entity is encouraged to disclose additional information that may be relevant to users in understanding the financial position and liquidity of the entity, together with a commentary by management (e.g. amounts of undrawn borrowing facilities). The effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates. 196

211 Section 8 Accounting policies Presentation/Disclosure Requirement General requirements HKAS HKAS The notes to the financial statements should present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs of HKAS 1 Presentation of Financial Statements (see below). The entity should disclose in the summary of significant accounting policies: the measurement basis (or bases) used in preparing the financial statements; and the other accounting policies used that are relevant to an understanding of the financial statements. HKAS HKAS It is appropriate to disclose each significant accounting policy that is not specifically required by HKFRSs, but is selected and applied in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The entity should disclose, in the summary of significant accounting policies or other notes to the financial statements, the judgements that management has made in the process of applying the entity s accounting policies that have the most significant effect on the amounts recognised in the financial statements. Note: HKAS In the process of applying the entity s accounting policies, management makes various judgements, apart from those involving estimations, that can significantly affect the amounts recognised in the financial statements. Examples of judgements include: (1) whether financial assets are held-to-maturity investments; (2) when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities; (3) whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and (4) whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose entity is controlled by the entity. Key sources of estimation uncertainty HKAS HKAS The entity should disclose, in the notes to the financial statements, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes should disclose details of: their nature; and their carrying amount as at the balance sheet date. HKAS The disclosures in paragraph 116 of HKAS 1 are presented in a manner that helps users of financial statements to understand the judgments management makes about the future and about other key sources of estimation uncertainty. 197

212 Presentation/Disclosure Requirement Note: HKAS HKAS The key assumptions and other key sources of estimation uncertainty disclosed in accordance with paragraph 116 of HKAS 1 relate to the estimates that require management s most difficult, subjective or complex judgments. Examples of the types of disclosures are: (1) the nature of the assumption or other estimation uncertainty; (2) the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity; (3) the expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected; and (4) an explanation of changes made to past assumptions concerning those assets and liabilities, if the uncertainty remains unsolved. HKAS HKAS HKAS It is not necessary to disclose budget information or forecasts in making disclosures in paragraph 116 of HKAS 1 (see above). The disclosures in paragraph 116 of HKAS 1 (see above) are not required for assets and liabilities with a significant risk that their carrying amounts might change materially within the next financial year, if, at the balance sheet date, they are measured at fair value based on recently observable market prices. When it is impracticable to disclose the extent of the possible effects of a key assumption or another key source of estimation uncertainty at the balance sheet date, the entity discloses that it is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions could require a material adjustment to the carrying amount of the asset or liability affected. In all cases, the entity discloses the nature and carrying amount of the specific asset or liability (or class of assets or liabilities) affected by the assumption. Policies required to be disclosed by specific standards The following accounting policies should be disclosed, as required by specific HKFRSs: Joint controlled entities HKAS the method the venturer uses to recognise its interest in jointly controlled entities. Revenue HKAS the accounting policies adopted for the recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving the rendering of services; and Sch 10: 16(4) - the method by which turnover is arrived at. (c) Construction contracts HKAS the methods used to determine the contract revenue recognised in the period; and HKAS 11.39(c) - the methods used to determine the stage of completion of contracts in progress. (d) Borrowing costs HKAS the accounting policy adopted for borrowing costs. (e) Government grants HKAS the accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements. 198

213 Presentation/Disclosure Requirement (f) Employee benefits - defined benefit plans HKAS A - the accounting policy for recognising actuarial gains and losses. (g) Foreign currency Sch 10: 12(14) - the basis on which other currencies have been converted into the currency in which the balance sheet is expressed, where the amount of assets or liabilities affected is material. (h) Taxation Sch 10: 12(15) - the basis on which the amount, if any, set aside for Hong Kong Profits Tax is computed. (i) Property, plant and equipment HKAS the measurement bases used for determining the gross carrying amount of property, plant and equipment; HKAS the depreciation methods used; HKAS 16.73(c) - the useful lives or the depreciation rates used; (j) Investment properties HKAS 40.75(c) - when judgement as to whether the property qualifies as an investment property is required and the classification is difficult, the criteria the entity uses to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business; HKAS whether the fair value model or the cost model is applied; HKAS if the fair value model is applied, whether, and in what circumstances, property interests held under operating leases are classified and accounted for as investment property; HKAS HKAS if the cost model is applied, the depreciation methods used and the useful lives (or the depreciation rates used). (k) Intangible assets - for each class of intangible assets, distinguishing between internallygenerated intangible assets and other intangible assets: HKAS whether the useful lives are indefinite or finite, and if finite, the useful lives (or the amortisation rates used); HKAS the amortisation methods used for intangible assets with finite useful lives; HKAS (d) - the line item(s) of the income statement in which any amortisation of intangible assets is included. (l) Financial instruments HKFRS 7.21 HKFRS 7.B5 - for financial assets or financial liabilities designated as at fair value through profit or loss: (i) (ii) (iii) the nature of the financial assets or financial liabilities the entity has designated as at fair value through profit or loss; the criteria for so designating such financial assets or financial liabilities on initial recognition; and how the entity has satisfied any one of the following conditions for such designation: 199

214 Presentation/Disclosure Requirement HKAS 39.9(i) of FVTPL definition HKAS 39.9(ii) of FVTPL definition it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on different bases; a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity s key management personnel; HKAS 39.11A (c) in the case of a hybrid contract containing one or more embedded derivatives, an entity may designate the entire hybrid (combined) contract as a financial asset or financial liability at fair value through profit or loss unless: (1) the embedded derivative does not significantly modify the cash flows that otherwise would be required by the contract; or (2) it is clear with little or no analysis when a similar hybrid (combined) instrument is first considered that separation of the embedded derivative is prohibited; or HKAS (d) if an entity is required to separate an embedded derivative from its host contract, but is unable to measure the embedded derivative separately either at acquisition or at a subsequent financial reporting date, it should designate the entire hybrid (combined) contract as at fair value through profit or loss. For instruments designated in accordance with paragraph 9(i) of HKAS 39 (see (iii) above), that disclosure includes a narrative description of the circumstances underlying the measurement or recognition inconsistency that would otherwise arise. For instruments designated in accordance with paragraph 9(ii) of HKAS 39(see (iii) above), that disclosure includes a narrative description of how designation as at fair value through profit or loss is consistent with the entity s documented risk management or investment strategy. HKFRS 7.B5 - the criteria for designating financial assets as available for sale. HKFRS 7.B5(c) - whether regular way purchases and sales of financial assets are accounted for at trade date or at settlement date. HKFRS 7.B5(d) - when an allowance account is used to reduce the carrying amount of financial assets impaired by credit losses: (i) (ii) the criteria for determining when the carrying amount of impaired financial assets is reduced directly (or, in the case of a reversal of a write-down, increased directly) and when the allowance account is used; and the criteria for writing off amounts charged to the allowance account against the carrying amount of impaired financial assets. HKFRS 7.B5(e) - how net gains or net losses on each category of financial instrument are determined, for example, whether the net gains or net losses on items at fair value through profit or loss include interest or dividend income. HKFRS 7.B5(f) - the criteria the entity uses to determine that there is objective evidence that an impairment loss has occurred. HKFRS 7.B5(g) - when the terms of financial assets that would otherwise be past due or impaired have been renegotiated, the accounting policy for financial assets that are the subject of renegotiated terms. (m) Inventories HKAS the accounting policies adopted in measuring inventories, including the cost formula used. 200

215 Presentation/Disclosure Requirement (n) Exploration for and evaluation of mineral resources HKFRS the accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets. (o) Common control combination AG the accounting policy for a common control combination should be disclosed. Details of the accounting policy should include, but not be limited to, a discussion of the specific principles and bases applied under merger accounting. Changes in accounting policies HKAS 8.13 HKAS 8.14 Note: The entity should select and apply its accounting policies consistently for similar transactions, other events and conditions. The entity should change an accounting policy only if the change: is required by a Standard or an Interpretation; or results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows. HKAS 8.28 Sch 10: 17(6) When initial application of a Standard or an Interpretation has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, the entity should disclose: (c) (d) (e) (f) the title of the Standard or Interpretation; when applicable, that the change in accounting policy is made in accordance with its transitional provisions; the nature of the change in accounting policy; when applicable, a description of the transitional provisions; when applicable, the transitional provisions that might have an effect on future periods; for the current period and each prior period presented, to the extent practicable, the amount of the adjustment: (i) (ii) for each financial statement line item affected; and if HKAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share; (g) (h) Note: the amount of the adjustment relating to periods before those presented, to the extent practicable; and if retrospective application required by paragraph 19 or of HKAS 8 (see above) is impracticable for a particular period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat the above disclosures. 201

216 HKAS 8.29 Sch 10: 17(6) Presentation/Disclosure Requirement When a voluntary change in accounting policy has an effect on the current or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, the entity should disclose: (c) the nature of the change in accounting policy; the reasons why applying the new accounting policy provides reliable and more relevant information; for the current period and each prior period presented to the extent practicable, the amount of the adjustment: (i) (ii) for each financial statement line item affected; and if HKAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share; (d) (e) Note: the amount of the adjustment relating to periods before those presented, to the extent practicable; and if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstance that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat the above disclosures. 202

217 Section 9 Explanatory notes Presentation/Disclosure Requirement General HKAS s129a The following details should be disclosed in the financial statements: a description of the nature of the entity s operations and its principal activities; (c) (d) the name of the parent entity and the ultimate parent of the group; the domicile and legal form of the entity; and its country of incorporation and the address of the registered office (or principal place of business, if different from the registered office). The notes to the financial statements should: HKAS disclose the information required by HKFRSs that is not presented on the face of the financial statements; and HKAS 1.103(c) provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement, but is relevant to an understanding of the financial statements. HKAS The notes to the financial statements should be presented in a systematic manner, with each item on the face of the financial statements cross-referenced to any related information in the notes. Prior period errors HKAS 8.49 The entity should disclose the following: the nature of the prior period error; for each prior period presented, to the extent practicable, the amount of the correction; (i) (ii) for each financial statement line items affected; and if HKAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share; (c) (d) Note: the amount of the correction at the beginning of the earliest prior period presented; and if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Financial statements of subsequent periods need not repeat those disclosures. Changes in accounting estimates HKAS 8.39 HKAS 8.40 HKAS The entity should disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect. If the amount of the effect in future periods is not disclosed because estimating it is impracticable, the entity should disclose that fact. If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year, but a separate report is not published for that final interim period, the nature and amount of the change in estimate should be disclosed in a note to the annual financial statements for that financial year. 203

218 HKAS Presentation/Disclosure Requirement The entity should disclose the nature and effect of any change in an accounting estimate relating to property, plant and equipment that has an effect in the current period or is expected to have an effect in subsequent periods, in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. New standards or interpretations issued but not yet effective HKAS 8.30 When the entity has not applied a new Standard or Interpretation that has been issued but is not yet effective, the entity should disclose: this fact; and known or reasonably estimable information relevant to assessing the possible impact that application of the new Standard or Interpretation will have on the entity s financial statements in the period of initial application. Note: HKAS 8.31 In complying with paragraph 30 of HKAS 8, the entity considers disclosing: (1) the title of the new Standard or Interpretation; (2) the nature of the impending change or changes in accounting policy; (3) the date by which the application of the Standard or Interpretation is required; (4) the date as at which it plans to apply the Standard or Interpretation initially; and (5) either: a discussion of the impact that initial application of the Standard or Interpretation is expected to have the entity s financial statements; or if that impact is not known or reasonably estimable, a statement to that effect. Revenue Sch 10: 16(2)&(3) HKAS The turnover for the year should be disclosed, except insofar as it is attributable to the business of banking. If an amount is omitted because it arises from the business of banking, that fact should be disclosed. The entity should disclose the amount of each significant category of revenue recognised during the period, including revenue arising from: (c) (d) (e) the sale of goods; the rendering of services; interest; royalties; and dividends. HKAS 18.35(c) HKAS Sch 10: 13(1)(h) The entity should disclose the amount of revenue arising from exchanges of goods or services included in each significant category of revenue. The entity should disclose the amount of contract revenue recognised as revenue in the period. If a substantial part of revenue consists of rents from land and buildings, the entity should disclose the amount thereof (after deduction of ground rents, rates and other outgoings). 204

219 Presentation/Disclosure Requirement Non-current assets held for sale and discontinued operations HKFRS 5.30 The entity should present and disclose information that enables users of the financial statements to evaluate the financial effects of discontinued operations and disposals of non-current assets (or disposal groups). Presenting discontinued operations HKFRS 5.33 The entity should disclose a single amount on the face of the income statement comprising the total of the post-tax profit or loss on discontinued operations and the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operations. The entity should give an analysis of the above single amount into: Note: the revenue, expenses and pre-tax profit or loss of discontinued operations, and the related income tax expense; and the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operations, and the related income tax expense. The above analysis may be presented in the notes or on the face of the income statement. If it is presented on the face of the income statement, it should be presented in a section identified as relating to discontinued operations, i.e. separately from continuing operations. The above analysis is not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisitions. HKFRS 5.33 The entity should disclose the net cash flows attributable to the operating, investing and financing activities of discontinued operations. Note: The disclosures required by paragraph 33(c) of HKFRS 5 may be presented either in the notes or on the face of the financial statements. These disclosures are not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition. HKFRS 5.34 HKFRS 5.35 The entity should re-present the disclosures in paragraph 33 of HKFRS 5 for prior periods presented in the financial statements so that the disclosures relate to all operations that have been discontinued by the balance sheet date for the latest period presented. Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period should be classified separately in discontinued operations. Notes: 1. The nature and amount of such adjustments should be disclosed. 2. Examples of circumstances in which these adjustments may arise including the following: (c) the resolution of uncertainties that arise from the terms of the disposal transaction, such as the resolution of purchase price adjustments and indemnification issues with the purchaser; the resolution of uncertainties that arise from and are directly related to the operations of the component before its disposal, such as environment and product warranty obligations retained by the seller; and the settlement of employee benefit plan obligations, provided that the settlement is directly related to the disposal transaction. 205

220 HKFRS 5.36 Presentation/Disclosure Requirement If the entity ceases to classify a component of an entity as held for sale, the results of operations of the component previously presented in discontinued operations in accordance with paragraphs of HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations should be reclassified and included in income from continuing operations for all periods presented. The amounts for prior periods should be described as having been re-presented. Gains or losses relating to continuing operations HKFRS 5.37 Any gain or loss on the remeasurement of a non-current asset (or disposal group) classified as held for sale that does not meet the definition of a discontinued operation should be included in profit or loss from continuing operations. Additional disclosures HKFRS 5.41 The entity should disclose the following information in the notes in the period in which a non-current asset (or disposal group) has been either classified as held for sale or sold: (c) (d) a description of the non-current asset (or disposal group); a description of the facts and circumstances of the sale, or leading to the expected disposal, and the expected manner and timing of that disposal; the gain or loss recognised in accordance with paragraphs 20 to 22 of HKFRS 5 (i.e. impairment losses and reversals) and if not separately presented on the face of the income statement, the caption in the income statement that includes that gain or loss; and if applicable, the segment in which the non-current asset (or disposal group) is presented in accordance with HKAS 14 Segment Reporting. HKFRS 5.42 If either paragraph 26 or paragraph 29 of HKFRS 5 applies, the entity should disclose, in the period of the decision to change the plan to sell the non-current asset (or disposal group), the following: a description of the facts and circumstances leading to the decision; and the effect of the decision on the results of operations for the period and any prior periods presented. Disposal groups that are to be abandoned HKFRS 5.13 If a disposal group to be abandoned meets the criteria in paragraphs 32 to 32(c) of HKFRS 5, the entity should present the results and cash flows of the disposal group as discontinued operations in accordance with paragraphs 33 and 34 of HKFRS 5 at the date on which it ceases to be used. Note: The entity should not classify a non-current asset (or a disposal group) that is to be abandoned as held for sale. This is because its carrying amount will be recovered principally through continuing use. Discontinued operations of associates HKAS The investor s share of any discontinued operations of associates accounted for using the equity method should be separately disclosed. Non-current assets (disposal groups) meeting the criteria for classification as held for sale after the balance sheet date HKFRS 5.12 When a non-current asset (or disposal group) is classified as held for sale after the balance sheet date but before the authorisation of the financial statements for issue, the entity should disclose the information specified in paragraphs 41, and (d) of HKFRS 5 (see above) in the notes to the financial statements. Note: If the criteria in paragraphs 7 and 8 of HKFRS 5 are met after the balance sheet date, the entity should not classify a non-current asset (or disposal group) as held for sale in those financial statements when issued. 206

221 Presentation/Disclosure Requirement Investment income Sch 10: 13(1)(g) Income from investments should be disclosed, analysed between income from listed and unlisted investments. Other items of income and expenditure HKAS 1.86 Sch 10: 17(6) The nature and amount of material items of income and expense should be separately disclosed either on the face of the income statement or in the notes. When items of income and expense within profit or loss are of an exceptional or non-recurrent nature, the nature and amount of such items should be disclosed separately. Additional analysis of expenditure by nature HKAS 1.93 When expenses are classified by function, additional information should be disclosed on the nature of expenses, including depreciation and amortisation expense, and employee benefits expense. Investment properties HKAS 40.75(f) The entity should disclose the amounts recognised in profit or loss for: (c) (d) rental income from investment property; direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period; direct operating expenses (including repairs and maintenance) arising from investment properties that did not generate rental income during the period; and the cumulative change in fair value recognised in profit or loss on a sale of investment property from a pool of assets in which the cost model is used into a pool in which the fair value model is used (see paragraph 32C of HKAS 40). Cost of sales The financial statements should disclose: HKAS 2.36(d) the amount of inventories recognised as an expense during the period; HKAS 2.36(e) the amount of any write-down of inventories recognised as an expense in the period; HKAS 2.36(f) (c) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period; and HKAS 2.36(g) (d) the circumstances or events that lead to the reversal of a write-down of inventories. Finance costs Sch 10: 13(1) Interest paid should be analysed between: interest on bank loans, overdrafts, and loans which are due for repayment on demand or wholly within five years of the balance sheet date; and interest on other loans. Sch 10: 31(e) Note: A loan should be deemed to fall due for repayment and an instalment of a loan should be deemed to fall due for payment, on the earliest date on which the lender could require repayment if he exercised all options and rights available to him. 207

222 Presentation/Disclosure Requirement Government grants related to income HKAS Grants related to income should be presented as a credit in the income statement either: separately or under a general heading such as other income ; or deducted in reporting the related expense. Notes: HKAS Whichever method of presenting grants related to income has been selected, disclosure of the amount of the grant may be necessary for a proper understanding of the financial statements. HKAS Disclosure of the effect of grants on any item of income or expense which is required to be separately disclosed is usually appropriate. HKAS HKAS Where a government grant has been awarded for the purpose of giving immediate financial support to the entity, rather than as an incentive to undertake specific expenditures, such that the grant has been recognised as income in the period in which the entity qualifies to receive it, the entity is required to provide sufficient disclosure to ensure that the effect of the grant is clearly understood. Where a government grant has been awarded as compensation for expenses or losses in a previous period, rather than as an incentive to undertake specific expenditures, such that the grant has been recognised as income in the period in which the entity qualifies to receive it, the entity is required to provide sufficient disclosure to ensure that the effect of the grant is clearly understood. Exchange differences HKAS The amount of exchange differences recognised in profit or loss (except for those arising on financial instruments measured at fair value through profit or loss in accordance with HKAS 39) should be disclosed. Compensation received HKAS 16.74(d) The amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in profit or loss should be disclosed (if it is not disclosed separately on the face of the income statement). Auditor s remuneration Sch 10: 15 The entity should disclose the auditor s remuneration, including expenses. Depreciation of fixed assets Sch 10: 13(1) Sch 10: 18(2) The entity should disclose the amount charged to revenue as provision for depreciation, renewals or diminution in the value of fixed assets (other than shares in subsidiaries): Sch 10: 13(4) if the amounts charged by way of depreciation or diminution in value of any fixed assets (other than investments) have been determined otherwise than by reference to the balance sheet values, that fact should be stated; and Sch 10: 13(3) if, in the case of assets in respect of which provision has been made for depreciation or diminution in value, amounts have also been charged to revenue by way of provision for the renewal of the same assets, those amounts should be stated separately. Gains or losses arising from derecognition of property, plant and equipment HKAS HKAS The gain or loss arising from the derecognition of an item of a property, plant and equipment should be included in profit or loss when the item is derecognised (unless HKAS 17 Leases requires otherwise on a sale and leaseback). Gains arising from the derecognition of an item of a property, plant and equipment should not be classified as revenue. 208

223 Presentation/Disclosure Requirement Research and development costs HKAS The entity should disclose the aggregate amount of research and development expenditure recognised as an expense during the period. Directors emoluments The following should be disclosed: s161(1) s161(2) s161(1) s161(3) s161(1)(c) s161(4) (c) the aggregate amount of directors emoluments, distinguishing between emoluments in respect of services as director, whether of the company or its subsidiary, and other emoluments; the aggregate amount of directors or past directors pensions, distinguishing between pensions in respect of services as directors, whether of the company or its subsidiary, and other pensions; and the aggregate amount of compensation to directors or past directors in respect of loss of office, distinguishing between compensation in respect of the office of director, whether of the company or its subsidiary, and compensation in respect of other offices. Taxation Sch 10: 17(4) The entity should disclose any special circumstances which affect its liability in respect of taxation of profits, income or capital gains: for the year; and for succeeding financial years. The following should be disclosed: Sch 10: 13(1)(c) the amount charged to revenue for Hong Kong Profits Tax; Sch 10: 17(3) the basis of computation of the amount disclosed under ; Sch 10: 13(1)(c) (c) if the amount charged would have been greater but for relief from double taxation, the amount which it would have been but for such relief; and Sch 10: 13(1)(c) (d) the charge to taxation imposed outside Hong Kong on profits, income and (so far as charged to revenue) capital gains. HKAS HKAS HKAS 12.81(c) The major components of tax expense (income) should be separately disclosed. The aggregate current and deferred tax relating to items that are charged or credited to equity should be separately disclosed. An explanation should be provided of the relationship between tax expense (income) and accounting profit in either or both of the following forms: a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed. The following should be disclosed: HKAS 12.81(d) an explanation of changes in the applicable tax rate(s) compared to the previous accounting period; and HKAS 12.81(h) in respect of discontinued operations, the tax expense relating to: 209

224 Presentation/Disclosure Requirement (i) (ii) the gain or loss on discontinuance; and the profit or loss from the ordinary activities of the discontinued operation for the period, together with the corresponding amounts for each prior period presented. HKAS Where exchange differences on deferred foreign tax liabilities or assets are recognised in the income statement, such differences may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to users of the financial statements. Note: HKAS 21 The Effects of Changes in Foreign Exchange Rates, requires certain exchange differences to be recognised as income or expense but does not specify where such differences should be presented in the income statement. HKAS 12.81(g)(ii) HKAS For each type of temporary difference, and each type of unused tax losses and unused tax credits, the entity should disclose the amount of the deferred tax income or expense recognised in the income statement, where not readily apparent from the changes in the amounts recognised in the balance sheet. The effect of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with HKAS 12 Income Taxes. Dividends Sch 10: 13(1)(j) HKAS 1.95 HKAS The entity should disclose the aggregate amount of dividends paid and proposed. The entity should disclose, either on the face of the income statement or the statement of changes in equity or in the notes, the amount of dividends recognised as distributions to equity holders during the period, and the related amount per share. The entity should disclose in the notes: the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to equity holders during the period, and the related amount per share; and the amount of any cumulative preference dividends not recognised. HKAS Note: Such dividends to holders of equity instruments declared after the balance sheet date should not be recognised as a liability at the balance sheet date. Sch 10: 12(3) The entity should disclose the amount of any arrears of fixed cumulative dividends and the period for which the dividends are in arrears, separately for each class of shares affected. Holding company income statement s123(5) Where the consolidated financial statements do not include an income statement for the holding company, the entity should disclose how much of the consolidated profit or loss is dealt with in the financial statements of the holding company. Property, plant and equipment HKAS 16.6 Items classified as property, plant and equipment in the financial statements should be limited to tangible assets that are both: held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one period. The following information should be disclosed for each class of property, plant and equipment: HKAS 16.73(d) Sch 10: 5(1) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and 210

225 Presentation/Disclosure Requirement HKAS 16.73(e) Sch 10: 12(8) a reconciliation of the carrying amount at the beginning and end of the period showing: (i) additions; (ii) (iii) (iv) (v) (vi) (vii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations, and other disposals; acquisitions through business combinations; increases or decreases during the period resulting from revaluations and from impairment losses recognised or reversed directly in equity under HKAS 36 Impairment of Assets (if any); impairment losses recognised in profit or loss during the period under HKAS 36 (if any); impairment losses reversed in profit or loss during the period under HKAS 36 (if any); depreciation charge; (viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and (ix) other changes. Revalued assets HKAS When items of property, plant and equipment are stated at revalued amounts, the following should be disclosed: (c) (d) (e) the effective date of the revaluation; whether an independent valuer was involved; the methods and significant assumptions applied in estimating the items fair values; the extent to which the items fair values were determined directly by reference to observable prices in an active market or recent market transactions on arm s length terms or were estimated using other valuation techniques; and for each revalued class of property, plant and equipment, the carrying amount that would have been recognised had the assets been carried under the cost model. Sch 10: 12(7) For fixed assets included at a valuation, the following should be disclosed: (c) the years in which the assets were severally valued; the several values; and in the case of assets valued during the year: (i) (ii) the names or qualification of the valuers; and the bases of valuation used. HKAS 16.80A Entities which carried property, plant and equipment at revalued amounts in financial statements relating to periods ended before 30 September 1995 are not required to make regular revaluations even if the carrying amounts of the revalued assets are materially different from the assets fair values, provided that: those entities do not revalue their property, plant and equipment subsequent to 30 September 1995; and disclosure of reliance on this paragraph is made in the financial statements. 211

226 Presentation/Disclosure Requirement Land and buildings Sch 10: 12(9) Sch 10: 31(c) Of the amount of fixed assets consisting of land, the entity should disclose how much is attributable to: land in Hong Kong: (i) (ii) (iii) held on long lease - not less than 50 years unexpired; held on medium-term lease - less than 50 years but not less than 10 years unexpired; and held on short lease - less than 10 years unexpired; Note: In respect of a renewable government lease, the unexpired period means the term remaining unexpired plus the term, if any, for which the lessee is entitled to renew. land outside Hong Kong: (i) (ii) (iii) (iv) freehold; held on long lease - not less than 50 years unexpired; held on medium-term lease - less than 50 years but not less than 10 years unexpired; and held on short lease - less than 10 years unexpired. HKAS Sch 10: 12(4) HKAS HKAS The financial statements should disclose the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities. The financial statements should disclose the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction. Entities are encouraged to disclose the following information: (c) (d) the carrying amount of temporarily idle property, plant and equipment; the gross carrying amount of any fully depreciated property, plant and equipment that is still in use; the carrying amount of property, plant and equipment retired from active use and not classified as neld for sale in accordance with HKFRS 5; and where property, plant and equipment is carried at cost less accumulated depreciation and accumulated impairment losses, the fair value of the property, plant and equipment when this is materially different from the carrying amount. Investment properties The following information should be disclosed: HKAS 40.75(g) the existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposals; and HKAS 40.75(h) contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements. 212

227 Presentation/Disclosure Requirement Investment properties measured using the fair value model For investment properties stated at fair value, the following should be disclosed: HKAS 40.75(d) the methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity should disclose) because of the nature of the property and lack of comparable market data; HKAS 40.75(e) the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an independent valuer who holds a recognised or relevant professional qualification and has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact should be disclosed; HKAS (c) a reconciliation of the carrying amount of investment property at the beginning and end of the period showing the following: (i) (ii) (iii) (iv) (v) (vi) (vii) additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised in the carrying amount of an asset; additions resulting from acquisitions through business combinations; assets classified as held for sale or included in a disposal group classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations, and other disposals; net gains or losses from fair value adjustments; the net exchange differences arising on the translation of the financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; transfers to and from inventories and owner-occupied property; and other changes. HKAS HKAS HKAS When a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, the entity should disclose a reconciliation between the valuation obtained and the adjusted valuation, showing separately the aggregate amount of any recognised lease obligations that have been added back, and any other significant adjustments. In the exceptional cases when the entity measures investment property using the cost model in HKAS 16 Property, Plant and Equipment, because of the lack of a reliable fair value (see paragraph 53 of HKAS 40), the reconciliation required by paragraph 76 of HKAS 40 (see above) should disclose amounts relating to that investment property separately from amounts relating to other investment property. In the exceptional cases when the entity measures investment property using the cost model in HKAS 16 Property, Plant and Equipment, because of the lack of a reliable fair value (see paragraph 53 of HKAS 40), the entity should disclose: (c) (d) a description of the investment property; an explanation of why fair value cannot be determined reliably; and if possible, the range of estimates within which fair value is highly likely to lie; and on disposal of investment property not carried at fair value: (i) (ii) (iii) the fact that the entity has disposed of investment property not carried at fair value; the carrying amount of that investment property at the time of sale; and the amount of gain or loss recognised. 213

228 Presentation/Disclosure Requirement Investment properties measured using the cost model HKAS 40.79(c) HKAS 40.79(d) HKAS 40.79(e) For investment properties measured using the cost model, the following information should be disclosed: the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; a reconciliation of the carrying amount of investment property at the beginning and end of the period showing the following: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) additions, disclosing separately those additions resulting from acquisitions and those resulting from capitalised subsequent expenditure recognised as an asset; additions resulting from acquisitions through business combinations; assets classified as held for sale or included in a disposal group classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations, and other disposals; depreciation; the amount of impairment losses recognised, and the amount of impairment losses reversed, during the period in accordance with HKAS 36 Impairment of Assets (if any); the net exchange differences arising on the translation of the financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; transfers to and from inventories and owner-occupied property; and other changes; and (c) the fair value of investment property. HKAS 40.79(e) In the exceptional cases described in paragraph 53 of HKAS 40, when the entity cannot determine the fair value of the investment property reliably, it should disclose: (c) a description of the investment property; an explanation of why fair value cannot be determined reliably; and if possible, the range of estimates within which fair value is highly likely to lie. Goodwill HKFRS 3.74 HKFRS 3.75 The entity should disclose information that enables users of its financial statements to evaluate changes in the carrying amount of goodwill during the period. The entity should disclose a reconciliation of the carrying amount of goodwill at the beginning and end of the period, showing separately: (c) the gross amount and the accumulated impairment losses at the beginning of the period; additional goodwill recognised during the period (except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations); adjustments resulting from subsequent recognition of deferred tax assets during the period; (d) goodwill included in a disposal group classified as held for sale in accordance with HKFRS 5 and goodwill derecognised during the period without having previously been included in a disposal group classified as held for sale; (e) impairment losses recognised during the period in accordance with HKAS 36 Impairment of Assets (if any); 214

229 Presentation/Disclosure Requirement (f) (g) (h) net exchange differences arising during the period in accordance with HKAS 21 The Effects of Changes in Foreign Exchange Rates (if any); any other changes in the carrying amount during the period (if any); and the gross amount and the accumulated impairment losses at the end of the period. Intangible assets Sch 10: 9(1) The written-down amount of goodwill, patents and trademarks should be disclosed. The financial statements should disclose the following for each class of intangible assets, distinguishing between internally-generated intangible assets and other intangible assets: HKAS (c) the gross carrying amount and the accumulated amortisation (aggregated with accumulated impairment losses), at the beginning and end of the period; and HKAS (e) a reconciliation of the carrying amount at the beginning and end of the period showing: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) additions, indicating separately those from internal development, those acquired separately, and those acquired through business combinations; assets classified as held for sale or included in a disposal group classified as held for sale in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations, and other disposals; increases or decreases during the period resulting from revaluations and from impairment losses recognised or reversed directly in equity under HKAS 36 Impairment of Assets (if any); impairment losses recognised in profit or loss during the period under HKAS 36 (if any); impairment losses reversed in profit or loss during the period under HKAS 36 (if any); amortisation recognised during the period; net exchange differences arising on the translation of the financial statements into the presentation currency, and on the translation of a foreign operation into the presentation currency of the reporting entity; and other changes in the carrying amount during the period HKAS HKAS The classes of intangible assets identified in HKAS 38 are disaggregated (aggregated) into smaller (larger) classes if this results in more relevant information for the users of the financial statements. The entity should disclose: for an intangible asset assessed as having an indefinite useful life, the carrying amount of that asset; for an intangible asset assessed as having an indefinite useful life: (i) (ii) the reasons supporting the assessment of an indefinite useful life; and a description of the factor(s) that played a significant role in determining that the asset has an indefinite useful life. Note: When the entity describes the factor(s) that played a significant role in determining whether the useful life of an intangible asset is indefinite or finite, the entity considers the list of factors in paragraph 90 of HKAS 38. HKAS The financial statements should also disclose a description, the carrying amount and the remaining amortisation period of any individual intangible asset that is material to the entity s financial statements. 215

230 HKAS (c) Presentation/Disclosure Requirement For intangible assets acquired by way of government grant and initially recognised at fair value, the entity should disclose: (c) the fair value initially recognised for those assets; their carrying amount; and whether they are measured after recognition under the cost model or the revaluation model. HKAS (d) HKAS (d) The existence and carrying amounts of intangible assets whose title is restricted should be disclosed. The carrying amounts of intangible assets pledged as security for liabilities should be disclosed. Intangible assets measured after recognition using the revaluation model HKAS If intangible assets are accounted for at revalued amounts, the entity should disclose the following by class of intangible assets: (c) the effective date of the revaluation; the carrying amount of revalued intangible assets; and the carrying amount that would have been recognised had the revalued class of intangible assets been measured after recognition using the cost model. HKAS (c) The entity should disclose the methods and significant assumptions applied in estimating an asset s fair values. Other information HKAS The entity is encouraged, but not required, to disclose the following information: a description of any fully amortised intangible asset that is still in use; and a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria of HKAS 38 or because they were acquired or generated before SSAP 29 Intangible Assets (issued in 2001) was effective. Subsidiaries Sch 10: 18(2) Sch 10: 24 The entity should disclose the aggregate amount of assets consisting of shares in subsidiaries (for consolidated financial statements, this applies to shares in subsidiaries not consolidated) and amounts owed by subsidiaries, distinguishing shares from indebtedness. Note: Where material current trading balances exist, consider disclosing those balances as part of current assets so that current and non-current assets are separately disclosed. s128(1)&(2) The Companies Ordinances requires the disclosure of the following information when the entity has subsidiaries at the end of a financial period: (c) the name of the subsidiary; the country of incorporation; the identity and proportion of the nominal value of the issued shares of each class held by: (i) (ii) the company and its nominees; and its subsidiaries and their nominees. 216

231 Presentation/Disclosure Requirement s128(4) s128(5) Note: The details should be provided for all subsidiaries except where, due to their number, it would result in particulars of excessive length being given. In such cases, details need only be provided in respect of subsidiaries which, in the opinion of the directors, principally affect the results or assets of the group, providing that a statement to that effect is made. HKAS 27.40(c) HKAS 27.4(d) HKAS 27.40(e) s126(2) Sch 10: 18(6) Sch 10: 25 The consolidated financial statements should disclose, where applicable, the nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than one half of the voting power. The consolidated financial statements should disclose the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential power of an investee does not constitute control. The consolidated financial statements should disclose the reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a reporting date or for a period that is different from that of the parent, and the reason for using a different reporting date or period. Business combinations Business combinations during the period HKFRS 3.66 HKFRS 3.67 The acquirer should disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that were effected during the period. For each business combination that was effected during the period, the acquirer should disclose the following information: (c) (d) the names and descriptions of the combining entities or businesses; the acquisition date; the percentage of voting equity instruments acquired; the cost of the combination and a description of the components of that cost, including any costs directly attributable to the combination. When equity instruments are issued or issuable as part of the cost, the following information should be disclosed: (i) (ii) the number of equity instruments issued or issuable; and the fair value of those instruments and the basis for determining that fair value; - if a published price does not exist for the instruments at the date of exchange, the significant assumptions used to determine fair value; - if a published price exists at the date of exchange but was not used as the basis for determining the cost of the combination, that fact together with the reasons why the published price was not used; the methods and significant assumptions used to attribute a value to the equity instruments; and the aggregate amount of the difference between the value attributed to, and the published price of, the equity instruments; (e) (f) (g) (h) details of any operations the entity has decided to dispose of as a result of the combination; the amounts recognised at the acquisition date for each class of the acquiree s assets, liabilities and contingent liabilities; the carrying amounts of each class of the acquiree s assets, liabilities and contingent liabilities, determined in accordance with HKFRSs, immediately before the combination (unless such disclosure would be impracticable); if the disclosure required by item (g) above would be impracticable, that fact together with an explanation of why this is the case; 217

232 Presentation/Disclosure Requirement (i) (j) the amount of any excess of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of the business combination recognised in profit or loss, and the line item in the income statement in which the excess is recognised; a description of the factors that contributed to a cost that results in the recognition of goodwill; (i) (ii) a description of each intangible asset that was not recognised separately from goodwill; and an explanation of why the intangible asset s fair value could not be measured reliably; (k) (l) a description of each intangible asset that was not recognised separately from goodwill and an explanation of why the intangible asset s fair value could not be measured reliably; a description of the nature of any excess of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of the business combination recognised in profit or loss; (m) the amounts of the acquiree s profit or loss since the acquisition date included in the acquirer s profit or loss for the period (unless such disclosure would be impracticable); and (n) if disclosure required by item (m) above would be impracticable, that fact together with an explanation of why this is the case. HKFRS 3.68 HKAS HKFRS 3.70 For business combinations effected during the period that are individually immaterial, the information required by paragraph 67 of HKFRS 3 above may be disclosed in aggregate. If, in accordance with paragraph 84 of HKAS 36, any portion of the goodwill acquired in a business combination during the period has not been allocated to a cash-generating unit (group of units) at the reporting date, the amount of the unallocated goodwill should be disclosed together with the reasons why that amount remains unallocated. The acquirer should disclose the following information, unless disclosure would be impracticable: the revenue of the combined entity for the period as though the acquisition date for all business combinations had been the beginning of that period; and the profit or loss of the combined entity for the period as though the acquisition date for all business combinations had been the beginning of the period. HKFRS 3.70 If the disclosure required by paragraph 70 of HKFRS 3 above would be impracticable, that fact together with an explanation of why this is the case should be disclosed. Business combinations after the balance sheet date HKFRS 3.66 HKFRS 3.71 HKFRS 3.71 The acquirer should disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that were effected after the balance sheet date but before the financial statements are authorised for issue. For each business combination effected after the balance sheet date but before the financial statements are authorised for issue, the acquirer should disclose the information required by paragraph 67 of HKFRS 3 (unless such disclosure would be impracticable). If the disclosure of all of the information required by paragraph 71 of HKFRS 3 would be impracticable, that fact together with an explanation of why this is the case should be disclosed. The initial accounting for a business combination was determined provisionally HKFRS 3.69 If the initial accounting for a business combination that was effected during the period was determined only provisionally as described in paragraph 62 of HKFRS 3, that fact should be disclosed together with an explanation of why this is the case. 218

233 HKFRS 3.62 Presentation/Disclosure Requirement Where the acquirer has made adjustments to provisional values determined at the time of the initial accounting for a business combination, in accordance with paragraph 62 of HKFRS 3, comparative information presented for the periods before the initial accounting for the combination is complete (i.e. for periods before the adjustments are made) should be presented as if the initial accounting had been completed from the acquisition date. Note: Adjustments to comparative information will include any additional depreciation, amortisation or other profit or loss effect recognised as a result of completing the initial accounting. Other information HKFRS 3.72 HKFRS 3.73 The acquirer should disclose information that enables users of its financial statements to evaluate the financial effects of gains, losses, error corrections and other adjustments recognised in the current period that relate to business combinations that were effected in the current or in previous periods. The acquirer should disclose: the amount and an explanation of any gain or loss recognised in the current period that: (i) (ii) relates to the identifiable assets acquired or liabilities or contingent liabilities assumed in a business combination that was effected in either the current or a previous period; is of such size, nature or incidence that disclosure is relevant to an understanding of the combined entity s financial performance; (c) if the initial accounting for a business combination that was effected in the immediately preceding period was determined only provisionally at the end of that period, the amounts and explanations of the adjustments to the provisional values recognised during the current period; and the information about error corrections required to be disclosed by HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors for any of the acquiree s identifiable assets, liabilities or contingent liabilities, or changes in the values assigned to those items, that the acquirer recognises during the period in accordance with paragraphs 63 and 64 of HKFRS 3. HKFRS 3.77 HKFRS 3.77A HKFRS 3.23A If in any situation the information required to be disclosed by HKFRS 3 does not satisfy the objectives set out in paragraphs 66, 72 and 74 of HKFRS 3, the entity should disclose such additional information as is necessary to meet those objectives. When a Hong Kong incorporated company acquires an entity which would be a subsidiary as defined in HKFRS 3 but is not accounted for as a subsidiary because it does not satisfy the definition of a subsidiary in the Companies Ordinance, it should disclose details of the effect on the group accounts had paragraph 23A of HKFRS 3 not applied in the notes to the financial statements. Business combinations under common control AG 5.2 Note: A business combination involving entities or businesses under common control is a business combination in which all of the combing entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. AG 5.16 AG 5.18 An entity applying Accounting Guideline 5 Merger Accounting for Common Control Combinations in accounting for a common control combination using the principles of merger accounting should disclose in the consolidated financial statements the fact that this Accounting Guideline has been used. An entity applying Accounting Guideline 5 Merger Accounting for Common Control Combinations should disclose in the consolidated financial statements significant details of the common control combinations. 219

234 AG 5.19 Presentation/Disclosure Requirement For each common control combination accounted for by using merger accounting, the following information should be disclosed: (c) (d) (e) the names of the combining entities (other than the reporting entity); the date of the common control combination; the composition of the consideration and fair value of the consideration other than shares issued; the nature and amount of significant accounting adjustments made to the net assets and net profit or loss of any entities or businesses to achieve consistency of accounting policies, and an explanation of any other significant adjustments made to the net assets and net profit or loss of any entity or business as consequence of the common control combination; and a statement of the adjustments to consolidated reserves. Investments in associates HKAS The following disclosures should be made: (c) (d) (e) (f) (g) (h) (i) the fair value of investments in associates for which there are published price quotations; summarised financial information of associates, including the aggregated amounts of assets, liabilities, revenues and profit or loss; the reasons why the presumption that an investor does not have significant influence is overcome if the investor holds, directly or indirectly through subsidiaries, less than 20 per cent of the voting or potential voting power of the investee but concludes that it has significant influence; the reasons why the presumption that an investor has significant influence is overcome if the investor holds, directly or indirectly through subsidiaries, 20 per cent or more of the voting or potential voting power of the investee but concludes that it does not have significant influence; the reporting date of the financial statements of an associate, when such financial statements are used in applying the equity method and are as of a reporting date or for a period that is different from that of the investor, and the reason why using a different reporting date or different period; the nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements or regulatory requirements) on the ability of associates to transfer funds to the investor in the form of cash dividends, or repayments of loans or advances; the unrecognised share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate; the fact that an associate is not accounted for using the equity method (if applicable); and summarised financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues and profit or loss (if applicable). Interests in joint ventures HKAS HKAS When proportionate consolidation is used by a venturer to account for its interest in a jointly controlled entity, one of the following reporting formats should be used: the venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with the similar items, line by line, in its financial statements (e.g. it may combine its share of the jointly controlled entity s inventory with its inventory, and its share of the jointly controlled entity s property, plant and equipment with its property, plant and equipment); or 220

235 Presentation/Disclosure Requirement the venturer may include separate line items for its share of the assets, liabilities, income and expenses of the jointly controlled entity in its financial statements (e.g. it may show its share of a current asset of the jointly controlled entity separately as part of its current assets; it may show its share of the property, plant and equipment of the jointly controlled entity separately as part of its property, plant and equipment). HKAS HKAS HK(SIC) - Int 13.7 The venturer should disclose a listing and description of interests in significant joint ventures and the proportion of ownership interest held in jointly controlled entities. The venturer that recognises its interests in jointly controlled entities using the line-by-line reporting format for proportionate consolidation or the equity method should disclose the aggregate amounts of each of current assets, long-term assets, current liabilities, long-term liabilities, income and expenses related to its interests in joint ventures. Unrealised gains or losses on non-monetary assets contributed to jointly controlled entities should be eliminated against the underlying assets under the proportionate consolidation method or against the investment under the equity method. Such unrealised gains or losses should not be presented as deferred gains or losses in the venturer s consolidated balance sheet. Financial instruments: disclosure General HKFRS 7.6 HKFRS 7.6 HKFRS 7.7 HKFRS 7.B1 to B3 An entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet. An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. Notes: 1. The classes of financial instruments described in HKFRS 7.6 are determined by the entity and are not the same as the categories of financial instruments specified in HKAS In determining the classes of financial instruments, the entity is required, as a minimum, to distinguish between instruments measured at amortised cost and those measured at fair value, and to treat as a separate class those financial instruments that fall outside the scope of HKFRS It is necessary to strike a balance between overburdening financial statements with excessive detail that may not assist users of financial statements and obscuring important information as a result of too much aggregation. Balance sheet Categories of financial assets and financial liabilities The carrying amounts of each of the following categories, as defined in HKAS 39 Financial Instruments: Recognition and Measurement, shall be disclosed either on the face of the balance sheet or in the notes: HKFRS 7.8 financial assets at fair value through profit or loss, showing separately: (i) those designated as such upon initial recognition; and (ii) those classified as held for trading in accordance with HKAS 39; HKFRS 7.8 held-to-maturity investments; HKFRS 7.8(c) (c) loans and receivables; HKFRS 7.8(d) (d) available-for-sale financial assets; 221

236 Presentation/Disclosure Requirement HKFRS 7.8(e) (e) financial liabilities at fair value through profit or loss, showing separately: (i) (ii) those designated as such upon initial recognition; and those classified as held for trading in accordance with HKAS 39; and HKFRS 7.8(f) (f) financial liabilities measured at amortised cost. Financial assets and financial liabilities at fair value through profit or loss If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it should disclose: HKFRS 7.9 the maximum exposure to credit risk of the loan or receivable (or group of loans or receivables) at the reporting date. HKFRS 7.36, HKFRS 7.B9 Note: The maximum exposure to credit risk at the reporting date should not take account of any collateral held or other credit enhancements (e.g. netting agreements that do not qualify for offset in accordance with HKAS 32 Financial Instruments: Presentation) For a financial asset, this is typically the gross carrying amount, net of: any amounts offset in accordance with HKAS 32; and any impairment losses recognised in accordance with HKAS 39. HKFRS 7.9 the amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk. HKFRS 7.9(c) (c) the amount of change during the period and cumulatively in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in credit risk of the financial asset that determine either: (i) (ii) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset. Note: (d) Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate, or index of prices or rates. the amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated. If the entity has designated a financial liability as at fair value through profit or loss in accordance with paragraph 9 of HKAS 39, it should disclose: HKFRS 7.10 the amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in credit risk of that liability determined either: (i) (ii) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (see also HKFRS 7.B4); or using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the liability. 222

237 Presentation/Disclosure Requirement HKFRS 7.10 Note: Changes in market conditions that give rise to market risk include changes in a benchmark interest rate, the price of another entity s financial instrument, a commodity price, a foreign exchange rate, or an index of prices or rates. For contracts that include a unit-linking feature, changes in market conditions include changes in the performance of the related internal or external investment fund. HKFRS 7.10 the difference between the financial liability s carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation. The entity should disclose: HKFRS 7.11 the methods used to determine the amount of change, during the period and cumulatively, that is attributable to changes in the credit risk in compliance with the requirements in paragraphs 9(c) and 10 of HKFRS 7 (see above). HKFRS 7.11 if the entity believes that the disclosure it has given to comply with the requirements in paragraph 9(c) or 10 of HKFRS 7 does not faithfully represent the change in the fair value of the financial asset or financial liability attributable to changes in its credit risk, the reasons for reaching this conclusion and the factors it believes are relevant. Reclassification HKFRS 7.12 If the entity has reclassified a financial asset as one measured: at cost or amortised cost, rather than at fair value; or at fair value, rather than at cost or amortised cost, it shall disclose the amount reclassified into and out of each category and the reason for that reclassification. Derecognition An entity may have either transferred financial assets in such a way that part or all of the financial assets do not qualify for derecognition. The entity shall disclose for each class of such financial assets: HKFRS 7.13 the nature of the assets; HKFRS 7.13 the nature of the risks and rewards of ownership to which the entity remains exposed; HKFRS 7.13(c) (c) when the entity continues to recognise all of the assets, the carrying amounts of the assets and of the associated liabilities; and HKFRS 7.13(d) (d) when the entity continues to recognise the assets to the extent of its continuing involvement, the total carrying amount of the original assets, the amount of the assets that the entity continues to recognise and the carrying amount of the associated liabilities. Collateral An entity should disclose: HKFRS 7.14 the carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities, including amounts that have been reclassified in the balance sheet separately from other assets if the transferee has the right to sell or repledge the collateral. HKFRS 7.14 the terms and conditions relating to its pledge. When an entity holds collateral (of financial or non-financial assets) and is permitted to sell or repledge the collateral in the absence of default by the owner of the collateral, it shall disclose: HKFRS 7.15 the fair value of the collateral held; 223

238 Presentation/Disclosure Requirement HKFRS 7.15 the fair value of any such collateral sold or repledged and whether the entity has an obligation to return it; and HKFRS 7.15(c) (c) the terms and conditions associated with its use of this collateral. Allowance account for credit losses HKFRS 7.16 When financial assets are impaired by credit losses and the entity records the impairment in a separate account (e.g. an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in that account during the period for each class of financial assets. Compound financial instrument with multiple embedded derivatives HKFRS 7.17 If an entity has issued an instrument that contains both a liability and an equity component and the instrument has multiple embedded derivatives whose values are interdependent (such as a callable convertible debt instrument), it shall disclose the existence of those features. Defaults and breaches For loans payable recognised at the reporting date, an entity shall disclose: HKFRS 7.18 details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable; HKFRS 7.18 the carrying amount of the loans payable in default at the reporting date; and HKFRS 7.18(c) (c) whether the default was remedied, or the terms of the loans payable were renegotiated, before the financial statements were authorized for issue. HKFRS 7.19 If, during the period, there were breaches of loan agreement terms other than those described in paragraph 18 of HKFRS 7 (see above), an entity shall disclose the same information as required by paragraph 18 if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the reporting date). Income statement and equity Items of income, expense, gains or losses An entity shall disclose the following items of income, expense, gains or losses either on the face of the financial statements or in the notes: HKFRS 7.20 net gains or net losses on: (i) (ii) (iii) (iv) (v) financial assets or financial liabilities at fair value through profit or loss, showing separately those on financial assets or financial liabilities designated as such upon initial recognition, and those on financial assets or financial liabilities that are classified as held for trading; available-for-sale financial assets, showing separately the amount of gain or loss recognised directly in equity during the period and the amount removed from equity and recognised in profit or loss for the period; held-to-maturity investments; loans and receivables; and financial liabilities measured at amortised cost; HKFRS 7.20 total interest income and total interest expense (calculated using the effective interest method) for financial assets or financial liabilities that are not at fair value through profit or loss; 224

239 Presentation/Disclosure Requirement HKFRS 7.20(c) (c) fee income and expense (other than amounts included in determining the effective interest rate) arising from: (i) (ii) financial assets or financial liabilities that are not at fair value through profit or loss; and trust and other fiduciary activities that result in the holding or investing of assets on behalf of individuals, trusts, retirement benefit plans, and other institutions; HKFRS 7.20(d) (d) accrued interest income on impaired financial assets; and HKFRS 7.20(e) (e) the amount of any impairment loss for each class of financial asset. Hedge accounting An entity shall disclose the following separately for each type of hedge (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign operations): HKFRS 7.22 a description of each type of hedge; HKFRS 7.22 a description of the financial instruments designated as hedging instruments and their fair values at the reporting date; and HKFRS 7.22(c) (c) the nature of the risks being hedged. For cash flow hedges, an entity shall disclose: HKFRS 7.23 the periods when the cash flows are expected to occur and when they are expected to affect profit or loss; HKFRS 7.23 a description of any forecast transaction for which hedge accounting had previously been used, but which is no longer expected to occur; HKFRS 7.23(c) (c) the amount that was recognised in equity during the period; HKFRS 7.23(d) (d) the amount that was removed from equity and included in profit or loss for the period, showing the amount included in each line item in the income statement; and HKFRS 7.23(e) (e) the amount that was removed from equity during the period and included in the initial cost or other carrying amount of a non-financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction. An entity shall disclose separately: HKFRS 7.24 in fair value hedges, gains or losses: (i) (ii) on the hedging instrument; and on the hedged item attributable to the hedged risk; HKFRS 7.24 the ineffectiveness recognised in profit or loss that arises from cash flow hedges; and HKFRS 7.24(c) (c) the ineffectiveness recognised in profit or loss that arises from hedges of net investments in foreign operations. 225

240 Presentation/Disclosure Requirement Fair value HKFRS 7.25 Except as set out in paragraph 29 of HKFRS 7 (see below), for each class of financial assets and financial liabilities, an entity shall disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount. HKFRS 7.26 Note: In disclosing fair values, an entity shall group financial assets and financial liabilities into classes, but shall offset them only to the extent that their carrying amounts are offset in the balance sheet. An entity shall disclose: HKFRS 7.27 the methods and, when a valuation technique is used, the assumptions applied in determining fair values of each class of financial assets or financial liabilities. Note: For example, if applicable, an entity discloses information about the assumptions relating to prepayment rates, rates of estimated credit losses, and interest rates or discount rates. HKFRS 7.27 whether fair values are determined, in whole or in part, directly by reference to published price quotations in an active market or are estimated using a valuation technique. HKFRS 7.27(c) (c) whether the fair values recognised or disclosed in the financial statements are determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument (i.e. without modification or repackaging) and not based on available observable market data; HKFRS 7.27(d) (d) if paragraph 27(c) of HKFRS 7 (see above) applies, the total amount of the change in fair value estimated using such a valuation technique that was recognised in profit or loss during the period. HKFRS 7.27(c) In the circumstances described in paragraph 27(c) of HKFRS 7 (see above), for fair values that are recognised in the financial statements, if changing one or more of those assumptions to reasonably possible alternative assumptions would change fair value significantly, the entity shall state this fact and disclose the effect of those changes. HKFRS 7.27(c) Note: For this purpose, significance shall be judged with respect to profit or loss, and total assets or total liabilities, or, when changes in fair value are recognised in equity, total equity. If a difference exists between the fair value at initial recognition and the amount that would be determined at that date using a valuation technique (see note below), an entity shall disclose, by class of financial instrument: HKFRS 7.28 its accounting policy for recognizing that difference in profit or loss to reflect a change in factors (including time) that market participants would consider in setting a price; and HKFRS 7.28 the aggregate difference yet to be recognised in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference. HKFRS 7.28 Note: If the market for a financial instrument is not active, an entity establishes its fair value using a valuation technique. Nevertheless, the best evidence of fair value at initial recognition is the transaction price, unless the fair value of the instrument concerned is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. It follows that there could be a difference between the fair value at initial recognition and the amount that would be determined at that date using the valuation technique. 226

241 Presentation/Disclosure Requirement Disclosures of fair value are not required: HKFRS 7.29 when the carrying amount is a reasonable approximation of fair value, for example, for financial instruments such as short-term trade receivables and payables; HKFRS 7.29 for an investment in equity instruments that do not have a quoted market price in an active market, or derivatives linked to such equity instruments, that is measured at cost because its fair value cannot be measured reliably; or HKFRS 7.29(c) (c) for a contract containing a discretionary participation feature (as described in HKFRS 4, Insurance Contracts) if the fair value of that feature cannot be measured reliably. In the cases described in paragraphs 29 and (c) of HKFRS 7 (see above), an entity shall disclose information to help users of the financial statements make their own judgments about the extent of possible differences between the carrying amount of those financial assets or financial liabilities and their fair value, including: HKFRS 7.30 the fact that fair value information has not been disclosed for these instruments because their fair value cannot be measured reliably; HKFRS 7.30 a description of the financial instruments, their carrying amount, and an explanation of why fair value cannot be measured reliably; HKFRS 7.30(c) (c) information about the market for the instruments; HKFRS 7.30(d) (d) information about whether and how the entity intends to dispose of the financial instruments; and HKFRS 7.30(e) (e) if financial instruments whose fair value previously could not be reliably measured are derecognised, that fact, their carrying amount at the time of derecognition, and the amount of gain or loss recognised. Nature and extent of risks arising from financial instruments HKFRS 7.31 An entity shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date. Notes: HKFRS The disclosures required by paragraphs 33 to 42 of HKFRS 7 (see below) focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk. HKFRS 7.B6 2. The disclosures required by paragraphs 31 to 42 shall be either given in the financial statements or incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete. Qualitative disclosures For each type of risk arising from financial instruments, an entity shall disclose: HKFRS 7.33 the exposures to risk and how they arise; HKFRS 7.33 its objectives, policies and processes for managing the risk and the methods used to measure the risk; and HKFRS 7.33(c) (c) any changes in 33 or from the previous period. 227

242 Presentation/Disclosure Requirement Quantitative disclosures For each type of risk arising from financial instruments, an entity shall disclose: HKFRS 7.34 summary quantitative data about its exposure to that risk at the reporting date. This disclosure shall be based on the information provided internally to key management personnel of the entity (as defined in HKAS 24 Related Party Disclosures), for example the entity s board of directors or chief executive officer. HKFRS 7.B7 Note: When an entity uses several methods to manage a risk exposure, the entity shall disclose information using the method or methods that provide the most relevant and reliable information. HKFRS 7.34 the disclosures required by paragraphs 36 to 42 of HKFRS 7 (see below), to the extent not provided in paragraph 34 (see above), unless the risk is not material. HKFRS 7.34(c) HKFRS 7.B8 (c) concentrations of risk if not apparent from 34 and (see above), including: (i) a description of how management determines concentrations; (ii) (iii) a description of the shared characteristic that identifies each concentration (e.g. counterparty, geographical area, currency or market); and the amount of the risk exposure associated with all financial instruments sharing that characteristic. Note: Concentrations of risk arise from financial instruments that have similar characteristics and are affected similarly by changes in economic or other conditions. The identification of concentrations of risk requires judgment taking into account the circumstances of the entity HKFRS 7.35 If the quantitative data disclosed as at the reporting date are unrepresentative of an entity s exposure to risk during the period, an entity shall provide further information that is representative. Credit risk An entity shall disclose by class of financial instrument: HKFRS 7.36 the amount that best represents its maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements (e.g. netting agreements that do not qualify for offset in accordance with HKAS 32 Financial Instruments: Presentation); Notes: HKFRS 7.B9 1. For a financial asset, the maximum exposure to credit risk is typically the gross carrying amount net of any amounts offset in accordance with HKAS 32 and any impairment losses. HKFRS 7.B10 2. Activities that give rise to credit risk include granting loans, receivables, financial guarantees, making irrevocable loan commitments and entering into derivative contracts. HKFRS 7.36 in respect of the amount disclosed in 36 above, a description of collateral held as security and other credit enhancements; HKFRS 7.36(c) (c) information about the credit quality of financial assets that are neither past due nor impaired; and HKFRS 7.36(d) (d) the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated. 228

243 Presentation/Disclosure Requirement Financial assets that are either past due or impaired An entity shall disclose by class of financial asset: HKFRS 7.37 an analysis of the age of financial assets that are past due as at the reporting date but not impaired; HKFRS 7.37 an analysis of financial assets that are individually determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired; and HKFRS 7.37(c) (c) for the amounts disclosed in 37 and above, a description of collateral held by the entity as security and other credit enhancements and, unless impracticable, an estimate of their fair value. Collateral and other credit enhancements obtained When an entity obtains financial or non-financial assets during the period by taking possession of collateral it holds as security or calling on other credit enhancements (e.g. guarantees), and such assets meet the recognition criteria in other Standards, an entity shall disclose: HKFRS 7.38 the nature and carrying amount of the assets obtained; and HKFRS 7.38 when the assets are not readily convertible into cash, its policies for disposing of such assets or for using them in its operations. Liquidity risk An entity shall disclose: HKFRS 7,39 A maturity analysis for financial liabilities that shows the remaining contractual maturities. HKFRS 7.B11 to B16 Notes: 1. An entity must use its judgment to determine an appropriate number of time bands; 2. When a counterparty has a choice of when an amount is paid, the liability is included on the basis of the earliest date on which the entity can be required to pay; 3. When an entity is committed to make amounts available in installments, each installment is allocated to the earliest period in which the entity can be required to pay; 4. The amounts disclosed in the maturity analysis are the contractual undiscounted cash flows. Such undiscounted cash flows differ from the amount included in the balance sheet because the balance sheet amount is based on discounted cash flows; 5. If appropriate, an entity shall disclose the analysis of derivative financial instruments separately from that of non-derivative financial instruments in the contractual maturity analysis for financial liabilities; and 6. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date. HKFRS 7.39 A description of how it manages the liquidity risk inherent in 39 above. Market risk Sensitivity analysis Unless an entity complies with paragraph 41 of HKFRS 7 (see below), it shall disclose: HKFRS 7.40 a sensitivity analysis for each type of market risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date; 229

244 Presentation/Disclosure Requirement Notes: HKFRS 7.B17 1. An entity decides how it aggregates information to display the overall picture without combining information with different characteristics about exposures to risks from significantly different economic environments. If an entity has exposure to only one type of market risk in only one economic environment, it would not show disaggregated information; HKFRS 7.B18 2. An entity discloses the effect on profit or loss and equity at the balance sheet date assuming that a reasonably possible change in the relevant risk variable had occurred at the balance sheet date and had been applied to the risk exposures in existence at that date. An entity is not required to disclose the effect on profit or loss and equity for each change within a range of reasonably possible changes of the relevant risk variable. Disclosure of the effects of the changes at the limits of the reasonably possible range would be sufficient; and HKFRS 7.B21 3. an entity shall provide sensitivity analyses for the whole of its business, but may provide different types of sensitivity analysis for different classes of financial instruments. HKFRS 7.40 the methods and assumptions used in preparing the sensitivity analysis; and HKFRS 7.40(c) (c) changes from the previous period in the methods and assumptions used, and the reasons for such changes. HKFRS 7.41 If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks, it may use that sensitivity analysis in place of the analysis specified in paragraph 40 of HKFRS 7 (above). The entity shall also disclose: HKFRS 7.41 An explanation of the method used in preparing such a sensitivity analysis, and of the main parameters and assumptions underlying the data provided; and HKFRS 7.41 An explanation of the objective of the method used and of limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved. HKFRS 7.B20 Notes: 1. This applies even if such a methodology measures only the potential for loss and does not measure the potential for gain. 2. Such an entity might disclose: (i) (ii) (iii) The type of value-at-risk model used (e.g., whether the model relies on Monte Carlo simulations), an explanation about how the model works and the main assumptions (e.g., the holding period and confidence level); The historical observation period and weightings applied to observations within that period, An explanation of how options are dealt with in the calculations, and which volatilities and correlations (or, alternatively, Monte Carlo probability distribution simulations) are used. Other market risk disclosures HKFRS 7.42 When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 of HKFRS 7 (see above) are unrepresentative of a risk inherent in a financial instrument (for example because the year-end exposure does not reflect the exposure during the year), the entity shall disclose that fact and the reason it believes the sensitivity analyses are unrepresentative. 230

245 Presentation/Disclosure Requirement Members shares in co-operative and similar instruments HK(IFRIC) - Int 2.13 When a change in the redemption prohibition as mentioned in HK(IFRIC) - Int 2, leads to a transfer between financial liabilities and equity, the entity should disclose separately the amount, timing and reason for the transfer. Other disclosures Sch 10: 9(1) The following analyses of investments in securities are required: debt securities and equity securities; and listed investments and unlisted investments. Sch 10: 9(3) Sch 10: 12(11) Sch 10: 12(11) Sch 10: 5(2)(c) Sch 10: 19(1) s129(1)&(2) Listed investments should be analysed between those which have been granted a listing on The Stock Exchange of Hong Kong and those which have not. The entity should disclose the market value of listed investments if they are not carried at market value. The entity should disclose the Stock Exchange value of the listed investments, if the market value is stated at a higher amount than their Stock Exchange value. The entity should disclose the cost or directors valuation of unlisted investments. The entity should disclose the aggregate amount of assets consisting of shares in fellow subsidiaries. For each shareholding in companies where either, (i) the investing company s holding in any class of equity share capital of that company exceeds 20% of the nominal value of the issued shares of that class, or (ii) the aggregate amount of shareholdings in any one company exceeds 10% of the amount of its assets as stated in the investing company s balance sheet, the entity should disclose: s129(4) s129(5) (c) (d) the name of the company; the country of incorporation; the identity and proportion of the nominal values of the issued shares of each class held; and a statement, where appropriate, that the information given deals only with the companies whose results principally affect the profit or loss or amount of assets of this company. Accounting for leases by lessors Finance leases HKAS HKAS Lessors should recognise assets under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease. The following disclosures should be made in the financial statements for finance leases: a reconciliation between the total gross investment in the lease at the balance sheet date, and the present value of minimum lease payments receivable at the balance sheet date; the gross investment in the lease and the present value of minimum lease payments receivable at the balance sheet date, for each of the following periods: (i) (ii) (iii) not later than one year; later than one year and not later than five years; and later than five years; 231

246 Presentation/Disclosure Requirement (c) (d) (e) (f) (g) unearned finance income; the unguaranteed residual values accruing to the benefit of the lessor; the accumulated allowance for uncollectible minimum lease payments receivable; contingent rents recognised in income; and a general description of the lessor s material leasing arrangements. HKAS As an indicator of growth, it is often useful to disclose the gross investment less unearned income in new business added during the accounting period, after deducting the relevant amounts for cancelled leases. Operating leases HKAS HKAS Lessors should present assets subject to operating leases in their balance sheets according to the nature of the asset. The following disclosures should be made in the financial statements for operating leases: the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periods: (i) (ii) (iii) not later than one year; later than one year and not later than five years; and later than five years; (c) total contingent rents recognised as income in the period; and a general description of the lessor s significant leasing arrangements. HKAS Note: In addition to the requirements set out in paragraph 56 of HKAS 17, the disclosure requirements in HKAS 16 Property, Plant and Equipment, HKAS 36 Impairment of Assets, HKAS 38 Intangible Assets, HKAS 40 Investment Property, and HKAS 41 Agriculture, apply to lessors for assets provided under operating leases. Arrangements involving the legal form of a lease HK(SIC) - Int HK(SIC) - Int Where an arrangement involves the legal form of a lease but does not, in substance, involve a lease under HKAS 17 Leases, all aspects of the arrangement should be considered in determining the appropriate disclosures that are necessary to understand the arrangement and the accounting treatment adopted. The entity should disclose the following in each period in which an arrangement exists that involves the legal form of a lease but does not, in substance, involve a lease under HKAS 17: a description of the arrangement, including: (i) (ii) (iii) the underlying asset and any restrictions on its use; the life and other significant terms of the arrangement; and the transactions that are linked together, including any options; and (i) the accounting treatment applied to any fee received; (ii) (iii) the amount recognised as income in the period; and the line item of the income statement in which it is included. 232

247 Presentation/Disclosure Requirement HK(SIC) - Int Note: The disclosures required by paragraph 10 of HK(SIC) - Int 27 should be provided individually for each arrangement, or in aggregate for each class of arrangements (i.e. each grouping of arrangements with underlying assets of a similar nature). An arrangement contains a lease HK(IFRIC) - Int 4.15 If an entity concludes that it is impracticable to separate reliably payments for the leases (i.e. the right to use the asset) from payments for other elements in the same arrangement (e.g. for services and the cost of inputs), in the case of an operating lease, it should: (c) treat all payments under the arrangement as lease payments for the purposes of complying with the disclosure requirements of HKAS 17; disclose those payments separately from minimum lease payments of other arrangements that do not include payments for non-lease elements; and state the fact that the disclosed payments also include payments for non-lease elements in the arrangement. Impairment of assets HKAS For each class of assets, the financial statements should disclose: (c) (d) the amount of impairment losses recognised in profit or loss during the period and the line item(s) of the income statement in which those impairment losses are included; the amount of reversals of impairment losses recognised in profit or loss during the period and the line item(s) of the income statement in which those impairment losses are reversed; the amount of impairment losses on revalued assets directly in equity during the period; and the amount of reversal of impairment losses on revalued assets recognised directly in equity during the period. HKAS Note: A class of asset is a grouping of assets of similar nature and use in an entity s operations. HKAS The entity should disclose the following for each material impairment loss recognised or reversed during the period for an individual asset, including goodwill, or a cash-generating unit: (c) the events and circumstances that led to the recognition or reversal of the impairment loss; the amount of the impairment loss recognised or reversed; for an individual asset: (i) (ii) the nature of the asset; and the reportable segment to which the asset belongs, based on the entity s primary format (as defined in HKAS 14 Segment Reporting, if the entity applies HKAS 14); (d) for a cash-generating unit: (i) (ii) (iii) a description of the cash-generating unit (such as whether it is a product line, a plant, a business operation, a geographical area, a reportable segment as defined in HKAS 14 or other); the amount of the impairment loss recognised or reversed by class of assets and by reportable segment based on the entity s primary format (as defined in HKAS 14, if the entity applies HKAS 14); and if the aggregation of assets for identifying the cash-generating unit has changed since the previous estimate of the cash-generating unit s recoverable amount (if any), the entity should describe the current and former way of aggregating assets and the reasons for changing the way the cash-generating unit is identified; 233

248 Presentation/Disclosure Requirement (e) (f) (g) whether the recoverable amount of the asset (cash-generating unit) is its fair value less costs to sell or its value in use; if recoverable amount is fair value less costs to sell, the basis used to determine fair value less costs to sell (such as whether fair value was determined by reference to an active market); and if recoverable amount is value in use, the discount rate(s) used in the current estimate and previous estimate (if any) of value in use. HKAS The entity should disclose the following information for the aggregate impairment losses and the aggregate reversals of impairment losses recognised during the period for which no information is disclosed in accordance with paragraph 130 of HKAS 36 (see above): the main classes of assets affected by impairment losses (reversals of impairment losses); and the main events and circumstances that led to the recognition (reversal) of those impairment losses. HKAS The entity is encouraged to disclose the key assumptions used to determine the recoverable amount of assets (cash-generating units) during the period. Note: Paragraph 134 of HKAS 36 (see below) requires an entity to disclose information about the estimates used to measure the recoverable amount of a cash-generating unit when goodwill or an intangible asset with an indefinite useful life is included in the carrying amount of that unit. HKFRS 7.20(e) HKAS The entity should disclose the amount of any impairment loss recognised for each class of financial asset. The entity that reports segment information in accordance with HKAS 14 Segment Reporting, should disclose the following information for each reportable segment based on the entity s primary reporting segment: the amount of impairment losses recognised in profit or loss and directly in equity during the period; and the amount of reversals of impairment losses recognised in profit or loss and directly in equity during the period. HKAS The entity should disclose information on impaired property, plant and equipment in accordance with HKAS 36 Impairment of Assets. Estimates used to measure recoverable amounts of cash-generating units containing goodwill or intangible assets with indefinite useful lives HKAS HKFRS 3.76 The entity should disclose the following information for each cash-generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity s total carrying amount of goodwill or intangible assets with indefinite useful lives: (c) (d) the carrying amount of goodwill allocated to the unit (group of units); the carrying amount of intangible assets with indefinite useful lives allocated to that unit (group of units); the basis on which the unit s (group of units ) recoverable amount has been determined (i.e. value in use or fair value less costs to sell); if the unit s (group of units ) recoverable amount is based on value in use: 234

249 Presentation/Disclosure Requirement (i) a description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets / forecasts; Note: Key assumptions are those to which the unit s (group of unit s) recoverable amount is most sensitive. (ii) (iii) (iv) (v) a description of management s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experiences or external sources of information; the period over which management has projected cash flows based on financial budgets / forecasts approved by management and, when a period greater than five years is used for a cash-generating why that longer period is justified; the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets / forecasts, and the justification for using any growth rate that exceeds the long-term growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit (group of units) is dedicated; and the discount rate(s) applied to the cash flow projections; (e) if the unit s (group of units ) recoverable amount is based on fair value less costs to sell, the methodology used to determine fair value less costs to sell. If fair value less costs to sell is not determined using an observable market price for the unit (group of units), the following information should be disclosed: (i) a description of each key assumption on which management has based its determination of fair value less costs to sell; Note: Key assumptions are those to which the unit s (group of units ) recoverable amount is most sensitive. (ii) a description of management s approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience, or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information; and (f) if a reasonably possible change in a key assumption on which management has based its determination of the unit s (group of units ) recoverable amount would cause the unit s (group of units ) carrying amount to exceed its recoverable amount: (i) (ii) (iii) the amount by which the unit s (group of units ) recoverable amount exceeds its carrying amount; the value assigned to the key assumption; and the amount by which the value assigned to the key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit s (group of units ) recoverable amount to be equal to its carrying amount. HKAS If some or all of the carrying amount of goodwill or intangible assets with indefinite useful lives is allocated across multiple cash-generating units (group of units), and the amount so allocated to each unit (group of units) is not significant in comparison with the entity s total carrying amount of goodwill or intangible assets with indefinite useful lives, that fact should be disclosed, together with the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to those units (group of units). 235

250 HKAS Presentation/Disclosure Requirement In addition, if the recoverable amount of any of those units (group of units) are based on the same key assumption(s) and the aggregate carrying amount of goodwill or intangible assets with indefinite useful lives allocated to them is significant in comparison with the entity s total carrying amount of goodwill or intangible assets with indefinite useful lives, an entity should disclose: (c) (d) (e) (f) that fact; the aggregate carrying amount of goodwill allocated to those units (group of units); the aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units (group of units); a description of the key assumption(s); a description of management s approach to determining the value(s) assigned to the key assumption(s), whether those value(s) reflect past experience or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience or external sources of information; and if a reasonably possible change in the key assumption(s) would cause the aggregate of the units (groups of units) carrying amounts to exceed the aggregate of their recoverable amounts: (i) (ii) (iii) the amount by which the aggregate of the units (group of units ) recoverable amounts exceeds the aggregate of their carrying amounts; the value(s) assigned to the key assumption(s); the amount by which the value(s) assigned to the key assumption(s) must change, after incorporating any consequential effects of the change on the other variables used to measure recoverable amount, in order for the aggregate of the units (group of units ) recoverable amounts to be equal to the aggregate of their carrying amounts. HKAS Note: The most recent detailed calculation made in a preceding period of the recoverable amount of a cash-generating unit (group of units) may, in accordance with paragraph 24 or paragraph 99 of HKAS 36, be carried forward and used in the impairment test for that unit (group of units) in the current period provided specific criteria are met. When this is the case, the information for that unit (group of units) that is incorporated into the disclosures required by paragraphs 134 and 135 of HKAS 36 relate to the carried forward calculation of recoverable amount. Group indebtedness The entity should disclose separately the aggregate amounts due: Sch 10: 18(2) Sch 10: 24 from the company s subsidiaries (for consolidated financial statements, applies to subsidiaries not consolidated); and Sch 10: 19(1) from the company s holding companies and fellow subsidiaries, distinguishing between debentures and otherwise. Loans to trustees or employees Sch 10: 9(1)(c) The entity should disclose the aggregate amount of outstanding loans made to trustees or employees (other than directors) for the acquisition of shares in the company, or its holding company, under the provisions of sections 47C(4)&(c) of the Companies Ordinance. 236

251 Presentation/Disclosure Requirement Loans to officers The Companies (Amendment) Ordinance 2003 was approved on July 10, 2003 and came into operation on February 13, A new section 161B is introduced which contains the disclosure requirements on the particulars of every transaction in relation to loans to officers, which includes, e.g. a credit transaction entered into between a company and a director of the company, or a body corporate in which such a director at any time during the financial year held a controlling interest. s161b(18) s161b(1)&(4) (r1984) In the case of any loan, guarantee entered into or security provided before February 13, 2004, the particulars of these arrangements would have to be contained in the financial statements under the provision of s161b in force immediately before the commencement of the Companies (Amendment) Ordinance The disclosure requirements are set out in s161b(1) and s161b(6) of the Ordinance (see below), and s161b(5) and s161b(7)-(g) of the Ordinance (see below). References to the old s161b which became effective on August 1984, is followed by (r1984). For every relevant loan (see below) made by the company or a subsidiary, other than an authorised institution, after the commencement of the Companies (Amendment) Ordinance 1984 (i.e. August 31, 1984) but before the commencement of section 68 of the Companies (Amendment) Ordinance 2003 (i.e. February 13, 2004), the following should be disclosed: the name of borrower and, where: (i) (ii) the borrower is connected with a director of the company or of its holding company; or the borrower is a body corporate, and a director or a person connected with him has held a controlling interest therein, the name of that director; (c) (d) the terms of the loan, including the interest rate and any security; the principal and interest outstanding at the beginning and end of the financial year and the maximum amount outstanding during the year; and the amount of interest which, having fallen due, remained unpaid and the amount of provision for non-repayment by the borrower in respect of principal and interest. s161b(7)(r1984) Note: Relevant loan means any loan made to: a person who, whether or not he was an officer ( officer in relation to a body corporate includes a director, manager or secretary) of the company or a director of its holding company at the time the loan was made, was such an officer or director at any time during the financial year; or a body corporate in which a director of the company, at any time during the financial year, held a controlling interest, whether or not such controlling interest was so held at the time the loan was made; or (c) in the case of a loan made by either a listed company or a company which is a member of a group containing a listed company, the definition is extended to include a loan to connected persons, including: (i) the spouse of a director; (ii) any children or step-children of a director provided that they are below the age of 18 years; (iii) a person acting in his capacity as the trustee of any trust (other than an employee share scheme or pension scheme) which includes as beneficiaries, or which allows the trustee to exercise his powers for the benefit of, the director, his spouse, or any of his children or step-children below the age of 18 years; and (iv) a person acting in his capacity as a partner of a director or of any person who is connected to that director by virtue of (i),(ii) or (iii) above. 237

252 s161b(2)(r1984) s161b(3)(r1984) Presentation/Disclosure Requirement In respect of a relevant loan made by any person after August 31, 1984 but before February 13, 2004 in connection with which a guarantee is entered into or security is provided by the company other than an authorised financial institution, the entity should disclose: the name of borrower, and where: (i) (ii) the borrower is connected with a director of the company or of its holding company; or the borrower is a body corporate, and a director or a person connected with him has held a controlling interest therein, the name of that director; (c) the maximum liability of the company under the guarantee or security both at the beginning and end of the financial year; and any amount paid and any liability incurred by the company for the purpose of fulfilling the guarantee or discharging the security (including any loss incurred by the company by reason of the enforcement of the guarantee or security). s161b(5)(r1984) Notes: 1. Disclosure of the items required by s161b(1)(4)(r1984) of the Ordinance is not required where all of the conditions listed below apply: (c) (d) the loan is made by the company or by a subsidiary to an employee of the company or of the subsidiary; it does not exceed HK$100,000; it is certified by the directors of the company or subsidiary as having been made in accordance with the company s usual practice for loans to its employees or to the employees of the subsidiary; and it is neither a loan made by the company under a guarantee from or on a security provided by a subsidiary nor, if the loan is from a subsidiary, is it guaranteed or secured by the company or any other subsidiary. s161b(10)(r1984) 2. For loans to officers made before August 31, 1984, the financial statements are required to disclose in respect of such loans outstanding at the end of the year the particulars which, but for the Companies (Amendment) Ordinance 1984, would have had to be contained in the financial statements under the provisions of this section in force immediately before the commencement of that Ordinance, (i.e. the balances and repayments during the year). s161b(1) s161b(6) For every relevant transaction (see below) entered into by the company or a subsidiary, other than an authorised institution, after the commencement of Section 68 of the Companies (Amendment) Ordinance 2003 (i.e. February 13, 2004), the entity should disclose: the name of borrower and, where: (i) (ii) the borrower is connected with a director of the company or of its holding company; or the borrower is a body corporate, and a director or a person connected with him has held a controlling interest therein, the name of that director; the terms of the relevant transaction, including the amounts payable thereunder (whether in a lump sum or instalments or by way of periodical payments or otherwise), the interest rate and any security; 238

253 Presentation/Disclosure Requirement (c) (d) the principal and interest outstanding at the beginning and end of the financial year and the maximum amount outstanding during the year; and the amount of which, having fallen due, remained unpaid and the amount of provision for non-repayment by the borrower in respect of the principal and other amounts due. s161b(2) s161b(7) to (d) For every relevant transaction which consists of quasi-loans or credit transactions entered into by the company or a subsidiary, other than an authorised institution, after February 13, 2004, in lieu of the disclosure required in s161b(1) & s161b(6) of the Ordinance above, the following should be disclosed with respect to each borrower: the name of the person; if the person is also a borrower, where: (i) (ii) the borrower is connected with a director of the company or of its holding company; or the borrower is a body corporate, and a director or a person connected with him has held a controlling interest therein, the name of that director; (c) (d) the aggregate amount of the principal and interest outstanding on all relevant transactions of which that person is the borrower at the beginning and end of the financial year and the maximum amount outstanding during the year; and the aggregate amount of which, having fallen due, remained unpaid and the aggregate amount of provision for non-repayment by the person in respect of the principal and other amounts due. 239

254 Presentation/Disclosure Requirement s161b(14) Notes: Definitions: Relevant transaction means any loan, quasi-loan made to, or any credit transaction entered into for s161b(15) s161b(16) (c) (d) a person who, whether or not he was a director or other officer of the company or a director of its holding company at the time the loan, quasi-loan or credit transaction was made or entered into, is such an officer or director at any time during the financial year in respect of which the accounts are made up; or a body corporate in which a director of the company, at any time during the financial year, held a controlling interest, whether or not such controlling interest was so held at the time the loan, quasi-loan or credit transaction was made or entered into; and that the loan, quasi-loan or credit transaction is made or entered into during the financial year or, if made or entered into before it, is outstanding at any time during the financial year. in the case of a loan or quasi-loan made to, or a credit transaction entered into by either a listed company or a company which is a member of a group containing a listed company, the definition is extended to include a loan or a quasi-loan made to, or a credit transaction entered into with connected persons, including: (i) the spouse of a director; (ii) any children or step-children of a director provided that they are below the age of 18 years; (iii) (iv) a person acting in his capacity as the trustee of any trust (other than an employee s share scheme or pension scheme) which includes as beneficiaries, or which allows the trustee to exercise his powers for the benefit of, the director, his spouse, or any of his children or step-children below the age of 18 years; and a person acting in his capacity as a partner of a director or of any person who is connected to that director by virtue of (i), (ii) or (iii) above. s157h(10) Credit transaction means a transaction between one party ( the creditor ) and another party ( the borrower ) under which the creditor: (c) (d) supplies goods to the borrower under a hire-purchase agreement; sells goods or land to the borrower under a conditional sale agreement; leases or hires goods or leases land to the borrower in return for periodical payments; or otherwise disposes of land or supplies goods or services to the borrower on the understanding that payment (whether in a lump sum or instalments or by way of periodical payments or otherwise) is to be deferred. s157h(10) Quasi-loan means: a transaction under which one party ( the creditor ) agrees to pay, or pays otherwise than in pursuance of an agreement, a sum for another ( the borrower ): (i) (ii) on terms that the borrower (or a person on his behalf) will reimburse the creditor; or in circumstances giving rise to a liability on the borrower to reimburse the creditor; or a transaction under which one party ( the creditor ) agrees to reimburse, or reimburses otherwise than in pursuance of an agreement, expenditure incurred by another for another ( the borrower ): (i) (ii) on terms that the borrower (or a person on his behalf) will reimburse the creditor; or in circumstances giving rise to a liability on the borrower to reimburse the creditor. 240

255 s161b(3) s161b(4) s161b(6) Presentation/Disclosure Requirement In respect of every relevant transaction made by any person in connection with which a guarantee is entered into or security is provided by the company or a subsidiary, other than an authorised financial institution, after February 13, 2004, the entity should disclose: the name of borrower, and where: (i) (ii) the borrower is connected with a director of the company or of its holding company; or the borrower is a body corporate, and a director or a person connected with him has held a controlling interest therein, the name of that director; (c) the maximum liability of the company under the guarantee or security both at the beginning and end of the financial year; and any amount paid and any liability incurred by the company for the purpose of fulfilling the guarantee or discharging the security (including any loss incurred by the company by reason of the enforcement of the guarantee or security). s161b(5) s161b(7) to (g) In respect of every relevant transaction, which consist of quasi-loans or credit transactions, made by any person in connection with which a guarantee is entered into or security is provided by the company or a subsidiary, other than an authorised financial institution, after February 13, 2004, in lieu of the disclosure required by s161b(3), s161b(4) & s161b(6) of the Ordinance above, the following should be disclosed with respect to each borrower: the name of the person; and if the person is also a borrower, where: (i) (ii) the borrower is connected with a director of the company or of its holding company; or the borrower is a body corporate, and a director or a person connected with him has held a controlling interest therein, the name of the relevant director; (c) (d) the maximum liability of the company in respect of all guarantees or all securities both at the beginning and end of the financial year; and the aggregate amounts paid and the aggregate liabilities incurred by the company for the purpose of fulfilling the guarantees or discharging the security (including any loss incurred by the company by reason of the enforcement of the guarantee or security). Notes: s161b(11) Disclosure of the items required by s161b above is not required where all of the conditions listed below apply: (c) (d) the loan or quasi-loan made, or credit transaction entered into by the company or by a subsidiary is to an employee of the company or of the subsidiary; the principal amount does not exceed HK$100,000; it is certified by the directors of the company or subsidiary as having been made in accordance with the company s usual practice for loans to its employees or to the employees of the subsidiary; and it is neither a loan or quasi-loan made, or credit transaction entered into by the company under a guarantee from or on a security provided by a subsidiary nor, if it is from a subsidiary, is it guaranteed or secured by the company or any other subsidiary. 241

256 Presentation/Disclosure Requirement Expenses not written off Sch 10: 3 The following should be disclosed under separate headings, so far as they are not written off: (c) (d) (e) preliminary expenses; expenses incurred in connection with any issue of share capital or debentures; sums paid by way of commission in respect of any shares or debentures; sums allowed by way of discount in respect of any debentures; and the amount of the discount allowed on any issue of shares at a discount. Inventories The financial statements should disclose: HKAS 2.36 the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; HKAS 2.36(c) the carrying amount of inventories carried at fair value less costs to sell; HKAS 2.36(h) (c) the carrying amount of inventories pledged as security for liabilities. Construction contracts HKAS The entity should disclose each of the following for contracts in progress at the balance sheet date: (c) the aggregate amount of costs incurred and recognised profits (less recognised losses) to date; the amount of advances received; and the amount of retentions. HKAS The entity should present: the gross amount due from customers for contract work as an asset; and the gross amount due to customers for contract work as a liability. Borrowing costs capitalized HKAS HKAS 23.29(c) The financial statements should disclose the amount of borrowing costs capitalised during the period. The financial statements should disclose the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. Shareholders equity HKAS 1.76 Sch 10:2 For each class of share capital, the following information should be disclosed, either on the face of the balance sheet or in the notes: (c) (d) the number of shares authorised; the number of shares issued and fully paid, and issued but not fully paid; par value per share, or that the shares have no par value; a reconciliation of the number of shares outstanding at the beginning and at the end of the period; 242

257 Presentation/Disclosure Requirement (e) (f) (g) the rights, preferences and restrictions attaching to that class, including restrictions on the distribution of dividends and the repayment of capital; shares in the entity held by the entity itself or by its subsidiaries or associates; and shares reserved for issue under options and contracts for the sale of shares, including the terms and amounts. Notes: HKAS An entity without share capital (e.g. a partnership or trust), should disclose information equivalent to that required by paragraph 76 of HKAS 1, showing changes during the period in each category of equity interest and the rights, preferences and restrictions attaching to each category of equity interest. 2. HKAS 1 does not provide any exemption from disclosure of comparatives for movements in share capital. Therefore, comparative movements for the prior period will be required for the reconciliation specified above, as well as for all other disclosures relating to share capital. Treasury shares HKAS HKAS HKAS Sch 10:2 If the entity (or another member of the consolidated group) reacquires its own equity instruments ( treasury shares ), those treasury shares should be deducted from equity. No gain or loss should be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity s own equity instruments. Consideration paid or received should be recognised directly in equity. The amount of treasury shares held should be disclosed separately either on the face of the balance sheet or in the notes. The entity makes appropriate disclosures in accordance with HKAS 24 Related Party Disclosures if the entity reacquires its own equity instruments from related parties. For redeemable shares, the following should be disclosed: (c) (d) the amount; the earliest and latest date on which the company has power to redeem them; whether they must be redeemed in any event or are liable to be redeemed at the option of the company; and the premium, if any, payable on redemption. s49h(1) Sch 10: 2 Sch 10: 18(3) The amount transferred to capital redemption reserve for redeemed shares should be disclosed. Where interest has been paid out of capital during the year, the share capital and the rate of interest should be disclosed. The entity should disclose the number, description and amount of the company s shares held beneficially by subsidiaries or their nominees. Reserves Sch 10: 6 HKAS 1.76 The aggregate amount of reserves should be disclosed. The financial statements should include a description of the nature and purpose of each reserve within owners equity, either on the face of the balance sheet or in the notes. Restrictions on distributions HKAS 27.40(f) The consolidated financial statements should disclose the nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances. 243

258 Presentation/Disclosure Requirement Amounts set aside Sch 10: 13(1)(d) The entity should disclose separately each of the amounts provided for the redemption of: share capital; and loans. The following should be disclosed, if material: Sch 10: 13(1)(e) amounts set aside to, or proposed to be set aside to, or withdrawn from, reserves; and Sch 10: 13(1)(f) amounts set aside to provisions (other than provisions for depreciation, renewals or diminution in value of assets) and the amounts withdrawn from such provisions if not applied for the purposes thereof. Share premium Sch 10: 2(c) The amount of the share premium account should be separately disclosed. Debentures, loans and bank overdrafts Sch 10: 9(1)(d) Sch 10: 9(1)(d) Sch 10: 9(4) The entity should disclose the aggregate amount of bank loans and overdrafts. The entity should disclose the aggregate amount of other loans, any part of which is repayable by instalments, or otherwise, more than five years after the balance sheet date. For each loan disclosed as required by Sch 10:9(1)(d) of the Ordinance, the following details should be stated: the terms on which it is repayable; and the rate of interest; or, if this results in disclosure which is excessively long, a general indication of the terms of repayment and interest rates. Sch 10: 11 For any of the company s debentures held by a nominee of or trustee for the company, the following should be disclosed: the nominal amount held; and the book value. Sch 10: 18(3) Sch 10: 2(d) The entity should disclose the number, description and amount of the company s debentures held beneficially by subsidiaries or their nominees. The entity should disclose particulars of any redeemed debentures which the company has the power to reissue. Accounting for leases by lessees Note: The disclosure requirements in respect of arrangements involving the legal form of a lease but which do not, in substance, involve a lease under HKAS 17 Leases are set out in previous section Arrangements involving the legal form of a lease (see above). These apply equally to lessees financial statements. 244

259 Presentation/Disclosure Requirement Finance leases HKAS HKAS HKAS It is not appropriate for the liabilities for leased assets to be presented in the financial statements as a deduction from the leased assets. If, for the presentation of liabilities on the face of the balance sheet, a distinction is made between current and non-current liabilities, the same distinction is made for leased liabilities. In addition to meeting the requirements of HKFRS 7 Financial Instruments: Disclosures, the following disclosures should be made in the financial statements for finance leases: (c) for each class of asset, the net carrying amount at the balance sheet date; a reconciliation between the total of minimum lease payments at the balance sheet date, and their present value; the total of minimum lease payments at the balance sheet date, and their present value, for each of the following periods: (i) (ii) (iii) not later than one year, later than one year and not later than five years; and later than five years; (d) (e) (f) contingent rents recognised as an expense in the period; the total of future minimum sublease payments expected to be received under noncancellable subleases at the balance sheet date; and a general description of the lessee s material leasing arrangements including, but not limited to, the following: (i) (ii) (iii) the basis on which contingent rent payable is determined; the existence and terms of renewal or purchase options and escalation clauses; and restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing. HKAS Note: In addition, the disclosure requirements in HKAS 16 Property, Plant and Equipment, HKAS 36 Impairment of Assets, HKAS 38 Intangible Assets, HKAS 40 Investment Property, and HKAS 41 Agriculture, apply to lessees for leased assets under finance lease. Operating leases In addition to meeting the requirements of HKFRS 7, the following disclosure should be made in the financial statements for operating leases: HKAS the total of future minimum lease payments under non-cancellable operating leases for each of the following periods: (i) (ii) (iii) not later than one year; later than one year and not later than five years; and later than five years; HKAS the total of future minimum sublease payments expected to be received under noncancellable subleases at the balance sheet date; HKAS 17.35(c) (c) lease and sublease payments recognised as an expense in the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments; 245

260 Presentation/Disclosure Requirement HKAS 17.35(d) (d) a general description of the lessee s significant leasing arrangements including, but not limited to, the following: (i) (ii) (iii) the basis on which contingent rent payable is determined; the existence and terms of renewal or purchase options and escalation clauses; and restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing; and Sch 10: 13(1)(i) (e) the amount, if material, charged to revenue in respect of sums payable for the hire of plant and machinery Secured liabilities Sch 10: 10 The description secured should be stated against any liabilities secured otherwise than by operation of law on any assets of the company or group. Tax assets and liabilities Sch 10: 12(15) HKAS 1.70 HKAS The entity should disclose the basis of computation of the amount set aside for Hong Kong profits tax. When an entity presents current and non-current assets and liabilities in its financial statements, deferred tax assets (liabilities) should not be classified as current assets (liabilities). Current tax assets and current tax liabilities should be offset if, and only if, both of the following conditions are satisfied: there is a legally enforceable right to set off the recognised amounts; and it is intended either to settle on a net basis, or to realise the asset and settle the liability simultaneously. HKAS Deferred tax assets and deferred tax liabilities should be offset if, and only if, both of the following conditions are satisfied: there is a legally enforceable right to set off current tax assets against current tax liabilities; and the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either: (i) (ii) the same taxable entity; or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. The following should be disclosed: HKAS 12.81(e) the amount (and expiry date, if any) of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised in the balance sheet; HKAS 12.81(f) the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, for which deferred tax liabilities have not been recognised; and HKAS 12.81(g)(i) (c) the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits. 246

261 HKAS HKAS 12.52A HKAS 12.82A HKAS 12.87A HKAS 12.81(i) HKAS 12.87B Presentation/Disclosure Requirement When the utilisation of a deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences, and the entity has suffered a loss in either the current or the preceding period in the tax jurisdiction to which the deferred tax asset relates, the amount of such a deferred tax asset and the nature of the evidence supporting its recognition should be disclosed. In some jurisdictions, income taxes are payable at a higher or lower rate if part of or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In these circumstances, the entity should disclose the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. In addition, the entity should disclose the amounts of the potential income tax consequences practicably determinable and whether there are any potential income tax consequences not practicably determinable. HKAS 12.82A requires an entity to disclose the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. The entity should disclose the important features of the income tax systems and the factors that will affect the amount of the potential income tax consequences of dividends. The entity should disclose the amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements. If applicable, the entity also discloses that there are additional potential income tax consequences not practicably determinable. Employee benefits Post-employment benefits HKAS HKAS HKAS A(g) For defined contribution plans, the entity should disclose the amount recognised as an expense in the period. Where required by HKAS 24 Related Party Disclosures, an entity discloses information about contributions to defined contribution plans for key management personnel. For defined benefit plans, the entity should disclose the total expense recognised in profit or loss for each of the following, and the line item(s) in which they are included: (c) (d) (e) (f) (g) current service cost; interest cost; expected return on plan assets; expected return on any reimbursement right recognised as an asset in accordance with paragraph 104A of HKAS 19; actuarial gains and losses; past service cost; the effect of any curtailment or settlement; and (h) the effect of the limit in paragraph 58 of HKAS 19. HKAS Note: HKAS 19 does not specify whether an entity should present current service cost, interest cost and the expected return on plan assets as components of a single item of income or expense on the face of the income statement. 247

262 HKAS Presentation/Disclosure Requirement An asset relating to one retirement benefit plan should be offset against a liability relating to another plan when, and only when, the following conditions are satisfied: the entity has a legally enforceable right to use a surplus in one plan to settle obligations under the other plan; and the entity intends either to settle the obligations on a net basis, or to realise the surplus in one plan and settle its obligations under the other plan simultaneously. HKAS Note: Where the entity distinguishes current assets and liabilities from non-current assets and liabilities for balance sheet presentation purposes, HKAS 19 does not specify whether an entity should distinguish current and non-current portions of assets and liabilities arising from post-employment benefits. The following information should be disclosed about defined benefit plans: HKAS A a general description of the type of plan; HKAS Note: Paragraph 120A requires a general description of the type of plan. Such a description distinguishes, for example, flat salary pension plans from final salary pension plans and from post-employment medical plans. The description of the plan should include informal practices that give rise to constructive obligations included in the measurement of the defined benefit obligation in accordance with paragraph 52 of HKAS 19. Further detail is not required. HKAS A(c) a reconciliation of opening and closing balances of the present value of the defined benefit obligation showing separately, if applicable, the effects during the period attributable to each of the following: (i) (ii) (iii) (iv) (v) (vi) (vii) current service cost; interest cost; contributions by plan participants; actuarial gains and losses; foreign currency exchange rate changes on plans measured in a currency different from the entity s presentation currency; benefits paid; past service cost; (viii) business combinations; (ix) (x) curtailments; and settlements. HKAS A(d) (c) an analysis of the defined benefit obligation into amounts arising from plans that are wholly unfunded and amounts arising from plans that are wholly or partly funded. 248

263 Presentation/Disclosure Requirement HKAS A(e) (d) a reconciliation of the opening and closing balances of the fair value of plan assets and of the opening and closing balances of any reimbursement right recognised as an asset in accordance with paragraph 104A of HKAS 19 showing separately, if applicable, the effects during the period attributable to each of the following: (i) (ii) (iii) (iv) (v) (vi) (vii) expected return on plan assets; actuarial gains and losses; foreign currency exchange rate changes on plans measured in a currency different from the entity s presentation currency; contributions by the employer; contributions by plan participants; benefits paid; business combinations; and (viii) settlements. HKAS A(f) (e) a reconciliation of the present value of the defined benefit obligation and the fair value of the plan assets to the assets and liabilities recognised in the balance sheet, showing at least: (i) (ii) (iii) (iv) (v) the net actuarial gains or losses not recognised in the balance sheet; the past service cost not recognised in the balance sheet; any amount not recognised as an asset, because of the limit in paragraph 58 of HKAS 19; the fair value at the balance sheet date of any reimbursement right recognised as an asset in accordance with paragraph 104A of HKAS 19 (with a brief description of the link between the reimbursement right and the related obligation); and the other amounts recognised in the balance sheet. HKAS A(h) (f) the total amount recognised in the statement of recognised income and expense for each of the following: (i) actuarial gains and losses; and (ii) the effect of the limit in paragraph 58 of HKAS 19. HKAS A(i) (g) for entities that recognise actuarial gains and losses in the statement of recognised income and expense in accordance with paragraph 93A of HKAS 19, the cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense. HKAS A(j) (h) for each major category of plan assets, which should include, but is not limited to, equity instruments, debt instruments, property, and all other assets, the percentage or amount that each major category constitutes of the fair value of the total plan assets. HKAS A(k) (i) the amounts included in the fair value of plan assets for: (i) (ii) each category of the entity s own financial instruments; and any property occupied by, or other assets used by the entity. HKAS A(l) (j) a narrative description of the basis used to determine the overall expected rate of return on assets, including the effect of the major categories of plan assets. HKAS A(m) (k) the actual return on plan assets, as well as the actual return on any reimbursement right recognised as an asset in accordance with paragraph 104A of HKAS

264 Presentation/Disclosure Requirement HKAS A(n) (l) the principal actuarial assumptions used as at the balance sheet date, including, when applicable: (i) (ii) (iii) (iv) (v) (vi) the discount rates; the expected rates of return on any plan assets for the periods presented in the financial statements; the expected rates of return for the periods presented in the financial statements on any reimbursement right recognised as an asset in accordance with paragraph 104A of HKAS 19; the expected rates of salary increases (and of changes in an index or other variable specified in the formal or constructive terms of a plan as the basis for future benefit increases); medical cost trend rates; and any other material actuarial assumptions used. An entity should disclose each actuarial assumption in absolute terms (for example, as an absolute percentage) and not just as a margin between different percentages or other variables. HKAS A(o) (m) the effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates on: (i) (ii) the aggregate of the current service cost and interest cost components of net periodic post-employment medical costs; and the accumulated post-employment benefit obligation for medical costs. For the purposes of this disclosure, all other assumptions should be held constants. For plans operating in a high inflation environment, the disclosure should be the effect of a percentage increase of decrease in the assumed medical cost trend rate of a significance similar to one percentage point in a low inflation environment. HKAS A(p) (n) the amounts for the current annual period and previous four annual periods of: (i) (ii) the present value of the defined benefit obligation, the fair value of the plan assets and the surplus or deficit in the plan; and the experience adjustments arising on: the plan liabilities expressed either as (1) an amount or (2) a percentage of the plan liabilities at the balance sheet date; and the plan assets expressed either as (1) an amount or (2) a percentage of the plan assets at the balance sheet date. HKAS Note: An entity may disclose the amounts required by paragraph 120A(p) of HKAS 19 as the amounts are determined for each annual period prospectively from the first annual period presented in the financial statements in which the entity first applies the amendments in paragraph 120A of HKAS 19. HKAS A(q) (o) the employer s best estimate, as soon as it can reasonably be determined, of contributions expected to be paid to the plan during the annual period beginning after the balance sheet date. 250

265 Presentation/Disclosure Requirement Notes: HKAS A general description of the type of plan is required by paragraph 120A of HKAS 19. The description of the plan should include informal practices that give rise to constructive obligations included in the measurement of the defined benefit obligation in accordance with paragraph 52 of HKAS 19. Further detail is not required. HKAS Where the entity has more than one defined benefit plan, disclosures may be made in total, separately for each plan, or in such groupings as are considered to be the most useful. Paragraph 122 of HKAS 19 states that groupings may be made with reference to the geographical locations of the plans (i.e. distinguishing domestic plans from foreign plans) and the risks associated with plans. Where an entity chooses to present disclosures in total, the disclosures are provided in the form of weighted averages or of relatively narrow ranges. HKAS An entity should disclose information that enables users of financial statements to evaluate the nature of its defined benefit plans and the financial effects of changes in these plans during the period. Where required by HKAS 24 Related Party Disclosures, the entity discloses information about: HKAS related party transactions with post-employment benefit plans; and post-employment benefits for key management personnel. HKAS Where required by HKAS 37 Provisions, Contingent Liabilities and Contingent Assets, an entity discloses information about contingent liabilities arising from post-employment benefit obligations. Defined benefit plans that share risks between various entities under common control HKAS HKAS 19.34B An entity participates in a defined benefit plan that shares risks between various entities under common control (for example, a parent and its subsidiaries) should make the following disclosures in its separate or individual financial statements: (c) (d) the contractual agreement or stated policy for charging the net defined benefit cost or the fact that there is no such policy; the policy for determining the contribution to be paid by the entity; if the entity accounts for an allocation of the net defined benefit cost in accordance with paragraph 34A of HKAS 19 Employee Benefits, all the information about the plan as a whole in accordance with paragraphs of HKAS 19; and if the entity accounts for the contribution payable for the period in accordance with paragraph 34A of HKAS 19, the information about the plan as a whole required in accordance with paragraphs 120A-(e), (j), (n), (o), (q) and 121 of HKAS 19. The other disclosures required by paragraph 120A of HKAS 19 do not apply. Post-employment benefits - multi-employer plans HKAS Where a multi-employer plan is accounted for as a defined benefit plan, the entity should disclose the information required by paragraph 120A of HKAS 19. Where sufficient information is not available to use defined-benefit accounting for a multi-employer plan that is a defined benefit plan, and the entity has accounted for the plan as a defined contribution plan, the entity should disclose: HKAS 19.30(i) the fact that the plan is a defined benefit plan; HKAS 19.30(ii) the reason why sufficient information is not available to enable the entity to account for the plan as a defined benefit plan; and 251

266 Presentation/Disclosure Requirement HKAS 19.30(c) (c) to the extent that a surplus or deficit in the plan may affect the amount of future contributions: (i) (ii) (iii) any available information about that surplus or deficit; the basis used to determine that surplus or deficit; and the implication, if any, for the entity HKAS 19.32B An entity is required to recognise, or disclose information about, certain contingent liabilities under HKAS 37 Provisions, Contingent Liabilities and Contingent Assets. Note: HKAS 19.32B In the context of a multi-employer plan, a contingent liability may arise from, for example: (1) Actuarial losses relating to other participating entities because each entity that participates in a multi-employer plan shares in the actuarial risks of every other participating entity; or (2) Any responsibility under the terms of a plan to finance any shortfall in the plan if other entities cease to participate. Short-term employee benefits HKAS Although HKAS 19 does not require specific disclosures about short-term employee benefits, other standards may require disclosures (e.g. HKAS 24 Related Party Disclosures requires an entity to disclose information about employee benefits for key management personnel and HKAS 1 Presentation of Financial Statements requires that an entity should disclose its employee benefits expense). Post-employment benefits - state plans HKAS HKAS (ii) The entity is required to disclose the same information for a state plan as HKAS 19 requires for a multi-employer plan. On implementation of HKAS 19, if the transitional liability for defined benefit plans, determined in accordance with paragraph 54 of HKAS 19, is more than the liability that would have recognised at the same date under the entity s previous accounting policy, and the entity elects to recognise that increase as an expense on a straight-line basis over to five years from the date of adoption, the entity should disclose at each balance sheet date: the amount of the increase that remains unrecognised; and the amount recognised in the current period. Other long-term employee benefits HKAS Although HKAS 19 does not require specific disclosures about other long-term employee benefits, other standards may require disclosures (e.g. where the expense resulting from such benefits is material and so would require disclosure in accordance with HKAS 1 Presentation of Financial Statements, or where HKAS 24 Related Party Disclosures requires an entity to disclose information about employee benefits for key management personnel). Termination benefits HKAS HKAS HKAS Where there is uncertainty about the number of employees who will accept an offer of termination benefits, the entity discloses information about the resultant contingent liability as required by HKAS 37 Provisions, Contingent Liabilities and Contingent Assets unless the possibility of an outflow in settlement is remote. As required by HKAS 1 Presentation of Financial Statements, an entity discloses the nature and amount of an expense arising from termination benefits if it is material. Where required by HKAS 24 Related Party Disclosures, an entity discloses information about termination benefits for key management personnel. 252

267 Presentation/Disclosure Requirement Share-based payments The nature and extent of share-based payment arrangements that existed during the period HKFRS 2.44 HKFRS 2.45 The entity should disclose information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements that existed during the period. The entity should disclose at least the following: a description of each type of share-based payment arrangement that existed at any time during the period, including the general terms and conditions of each arrangement; Notes: 1. Examples of the general terms and conditions of share-based payment transactions include vesting requirements, the maximum term of options granted, and the method of settlement (e.g. whether in cash or equity). 2. The entity with substantially similar types of share-based payment arrangements may aggregate this information, unless separate disclosure of each arrangement is necessary to satisfy the principle in paragraph 44 of HKFRS 2. HKFRS 2.45 the number and weighted average exercise prices of share options for each of the following groups of options: (i) (ii) (iii) (iv) (v) (vi) (vii) outstanding at the beginning of the period; granted during the period; forfeited during the period; exercised during the period; expired during the period; outstanding at the end of the period; and exercisable at the end of the period; HKFRS 2.45(c) (c) for share options exercised during the period, the weighted average share price at the date of exercise; and Note: If options were exercised on a regular basis throughout the period, the entity may instead disclose the weighted average share price during the period. HKFRS 2.45(d) (d) for share options outstanding at the end of the period, the range of exercise prices and weighted average remaining contractual life Note: If the range of exercise prices is wide, the outstanding options should be divided into ranges that are meaningful for assessing the number of timing of additional shares that may be issued and the cash that may be received upon exercise of those options. The basis of determination of the fair value of the goods or services received, or the fair value of the equity Instruments granted during the period HKFRS 2.46 HKFRS 2.47 The entity should disclose information that enables users of the financial statements to understand how the fair value of the goods and services received, or the fair value of the equity instruments granted, during the period was determined. If the entity has measured the fair value of goods or services received as consideration for equity instruments of entity indirectly, by reference to the fair value of the equity instruments granted, the entity should disclose at least the following information for share options granted during the period: 253

268 Presentation/Disclosure Requirement the weighted average fair value of those options at the measurement date; and the information on how the fair value of the share options was measured, including: (i) (ii) (iii) the option pricing model used; and the inputs to that model, including the weighted average share price, exercise price, expected volatility, option life, expected dividends, the risk-free interest rate and any other inputs to the model, including the method used and the assumptions made to incorporate the effects of expected early exercise; how expected volatility was determined, including an explanation of the extent to which expected volatility was based on historical volatility; and whether and how any other features of the option grant were incorporated into the measurement of fair value, such as a market condition. HKFRS 2.47 If the entity has measured the fair value of goods or services as consideration for equity instruments of the entity indirectly, by reference to the fair value of the equity instruments granted, the entity should disclose at least the following information for equity instruments other than share options granted during the period: the number and weighted average fair value of those equity instruments determined at the measurement date; the information on how that fair value of the equity instruments was measured, including: (i) (ii) if fair value was not measured on the basis of an observable market price, how it was determined; whether and how expected dividends were incorporated into the measurement of fair value; and (iii) whether and how any other features of the equity instruments granted were incorporated into the measurement of fair value. HKFRS 2.47(c) If the entity has measured the fair value of goods or services received as consideration for equity instruments of the entity indirectly, by reference to the fair value of the equity instruments granted, the entity should disclose at least the following information for share-based arrangements that were modified during the period: (c) an explanation of those modifications; the incremental fair value granted (as a result of those modifications); and information on how the incremental fair value granted was measured, consistently with the requirements set out in paragraph 47 & of HKFRS 2 (see above), where applicable. HKFRS 2.48 HKFRS 2.49 HKFRS 2.50 If share-based payment transactions were measured directly using the fair value of goods and services received during the period, the entity should disclose how that fair value was determined (e.g. whether fair value was measured at a market price for those goods or services). If the entity has rebutted the presumption that the fair value of the goods or services received from parties other than employees can be estimated reliably (and consequently the entity has measured the fair value of the goods or services from such parties by reference to the fair value of the equity instruments granted), the entity should disclose that fact, and give an explanation of why the presumption was rebutted. The entity should disclose information that enables users of the financial statements to understand the effect of share-based payment transactions on the entity s profit or loss for the period and on its financial position. 254

269 HKFRS 2.51 The entity should disclose at least the following: Presentation/Disclosure Requirement the total expense recognised for the period arising from share-based payment transactions in which the goods or services received did not qualify for recognition as assets, including separate disclosure of that portion of the total expense recognised for the period that arises from transactions accounted for as equity settled share-based payment transactions; and for liabilities arising from share-based payment transactions: (i) (ii) the total carrying amount at the end of the period; and the total intrinsic value at the end of the period of liabilities for which the counterparty s right to cash or other assets had vested by the end of the period (e.g. vested share appreciation rights). Additional information HKFRS 2.52 If the information required to be disclosed by HKFRS 2 does not satisfy the principles in paragraphs 44, 46 and 50 of HKFRS 2, the entity should disclose such additional information as is necessary to satisfy them. Share options Sch 10: 12(2) For options to subscribe for any shares in the company, the entity should disclose: (c) the number, description and amount of shares involved; the period during which the option is exercisable; and the price to be paid or shares subscribed for. Provisions Sch 10: 6 HKAS HKAS The aggregate amount of provisions should be disclosed (other than provisions for depreciation, renewals or diminution in value of assets). Accruals are often reported as part of trade and other payables, whereas provisions are reported separately. The entity should disclose the following for each class of provision: (c) a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits; an indication of the uncertainties about the amount or timing of those outflows including, where necessary to provide adequate information, the major assumptions made concerning future events; and the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. HKAS Sch 10: 7 For each class of provision, an entity should disclose: the carrying amount at the beginning and end of the period; (c) (d) (e) Note: additional provisions made in the period, including increases to existing provisions; amounts used (i.e. incurred and charged against the provision) during the period; unused amounts reversed during the period; and the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate. Comparative information is not required for the above disclosures. 255

270 Presentation/Disclosure Requirement Interests arising from decommissioning funds HK(IFRIC)-Int 5.1 HK(IFRIC)-Int 5.2 Note: The decommissioning fund is the decommissioning, restoration and environmental rehabilitation funds to segregate assets to fund some or all of the costs of decommissioning plant (such as a nuclear plant) or certain equipment (such as cars), or in undertaking environmental rehabilitation (such as rectifying pollution of water or restoring mined land). Contributions to these funds may be voluntary or required by regulation or law. HK(IFRIC)-Int 5.11 HK(IFRIC)-Int 5.12 HK(IFRIC)-Int 5.13 HK(IFRIC)-Int 5.9 An entity that makes contributions to the decommissioning fund should disclose the nature of its interest in a decommissioning fund and any restrictions on access to the assets in the decommissioning fund. When the entity has an obligation to make potential additional contributions that is not recognised as a liability, it should make the disclosures required by paragraph 86 of HKAS 37 Provisions, Contingent Liabilities and Contingent Assets (see item 9271). When the entity accounts for its interest in the decommissioning fund in accordance with the following, it should make the disclosures required by paragraph 85(c) of HKAS 37 (see item 9266 (c)): If the entity does not have control, joint control or significant influence over the fund, the contributor should recognise the right to receive reimbursement from the fund as a reimbursement in accordance with HKAS 37. This reimbursement should be measured at the lower of: (i) (ii) the amount of the decommissioning obligation recognised; and the contributor s share of the fair value of the net assets of the fund attributable to contributors. Changes in the carrying value of the right to receive reimbursement other than contributions to and payments from the fund should be recognised in profit or loss in the period in which these changes occur. Contingent liabilities HKAS Sch 10: 12(5) HKAS Unless the possibility of any outflow in settlement is remote, the entity should disclose, for each class of contingent liability at the balance sheet date, a brief description of the nature of the contingent liability. Where practicable, the following information should also be disclosed in respect of contingent liabilities: (c) an estimate of the financial effect of the contingent liabilities, under the measurement rules specified in paragraphs 36 to 52 of HKAS 37; an indication of the uncertainties relating to the amount or timing of any outflow; and the possibility of any reimbursement. HKAS Note: Where a provision and a contingent liability arise from the same set of circumstances, the entity should make the disclosures required by paragraphs 84 to 86 of HKAS 37 in a way that shows the link between the provision and the contingent liability. HKAS The investor should disclose the following contingent liabilities: its share of the contingent liabilities of an associate incurred jointly with other investors; and those contingent liabilities that arise because the investor is severally liable for all or part of the liabilities of the associate. 256

271 HKAS Presentation/Disclosure Requirement The venturer should disclose the aggregate amounts of the following contingent liabilities (unless the probability of loss is remote), separately from the amount of other contingent liabilities: (c) any contingent liabilities that the venturer has incurred in relation to its interests in joint ventures and its share in each of the contingent liabilities which have been incurred jointly with other venturers; its share of the contingent liabilities of the joint ventures themselves for which it is contingently liable; and those contingent liabilities that arise because the venturer is contingently liable for the liabilities of the other venturers in a joint venture. HKAS The entity should disclose any tax related contingent liabilities and contingent assets. Note: Contingent liabilities and contingent assets may arise, for example, from unresolved disputes with taxation authorities. Post-employment obligations HKAS Where required by HKAS 37, the entity discloses information about contingent liabilities arising from post-employment benefit obligations. Acquiree s contingent liabilities HKFRS 3.47 HKFRS 3.50 If a contingent liability of the acquiree has not been recognised separately as part of allocating the cost of a business combination, because its fair value cannot be measured reliably, the acquirer should disclose information about that contingent liability. For contingent liabilities recognised separately as part of the allocation of the cost of a business combination, the acquirer should disclose the information required by HKAS 37 for each class of provision. Contingent assets HKAS HKAS Where an inflow of economic benefits is probable, the entity should disclose a brief description of the nature of the contingent assets at the balance sheet date. Where practicable, the entity should disclose an estimate of the financial effect of the contingent asset, measured using the principles specified in paragraphs 36 to 52 of HKAS 37. Explanation of information not disclosed HKAS Where any of the information required by paragraphs 86 and 89 of HKAS 37 is not disclosed because it is not practicable to do so, that fact should be stated. HKAS In extremely rare cases, disclosure of some or all of the information required by paragraphs 84 to 89 of HKAS 37 can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision. In such cases, an entity need not disclose the information, but should disclose the general terms of the dispute, together with the fact that, and reason why, the information has not been disclosed. Commitments Sch 10: 12(6) An entity should disclose the amounts, if material, of capital expenditure: authorised but not contracted for; and contracted for but not provided for. HKAS 16.74(c) HKAS (e) The amount of contractual commitments for the acquisition of property, plant and equipment should be disclosed separately. The amount of contractual commitments for the acquisition of intangible assets should be disclosed. 257

272 HKAS Presentation/Disclosure Requirement The venturer should disclose the aggregate amounts of the following commitments in respect of its interests in joint ventures separately from other commitments: any capital commitments that the venturer in relation to its interests in joint ventures and its share in each of the capital commitments that have been incurred jointly with other venturers; and its share of the capital commitments of the joint ventures themselves. Government grants HKAS HKAS Government grants related to assets, including non-monetary grants at fair value, should be presented in the balance sheet either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. In order to show the gross investment in assets, the entity often discloses, as separate items in the cash flow statement, the purchase of assets and the receipt of related grants, regardless of whether or not the grant is deducted from the related asset for the purpose of balance sheet presentation. The following matters should be disclosed in the financial statements: HKAS the nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited; and HKAS 20.39(c) unfulfilled conditions and other contingencies attaching to government assistance that has been recognised. Sch 10:5 Note: If a government grant is deducted from the cost of an asset, a Hong Kong incorporated company is required to disclose the cost of the asset, before deduction of the government grant. HKAS Disclosure of the nature, extent and duration of significant government assistance may be necessary in order that the financial statements are not misleading. Other balance sheet items HKAS 1.74 The entity should disclose, either on the face of the balance sheet or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the entity s operations. Events after the balance sheet date HKAS HKAS If the entity receives information after the balance sheet date about conditions that existed at the balance sheet date, the entity should update disclosures that relate to those conditions, in the light of the new information. If non-adjusting events after the balance sheet date are material, non-disclosure could influence the economic decisions of users taken on the basis of the financial statements. Accordingly, the entity should disclose the following for each material category of non-adjusting event after the balance sheet date: the nature of the event; and an estimate of its financial effect, or a statement that such an estimate cannot be made. 258

273 HKAS 1.67 Presentation/Disclosure Requirement In respect of loans classified as current liabilities in accordance with HKAS 1 Presentation of Financial Statements, the following events that occur between the balance sheet date and the date the financial statements are authorised for issue qualify for disclosure as non-adjusting events: (c) refinancing on a long-term basis; rectification of a breach of a long-term loan agreement; and the receipt from the lender of a period of grace to rectify a breach of a long-term loan agreement ending at least twelve months after the balance sheet date. HKAS Where changes in tax rates or tax laws that are enacted or announced after the balance sheet date, the entity discloses any significant effect of those changes on its current and deferred tax assets and liabilities, in accordance with the general principles of HKAS 10 Events After the Balance Sheet Date. Related party disclosures HKAS 24.4 HKAS HKAS HKAS HKAS HKAS Related party transactions and outstanding balances with other entities in a group are disclosed in an entity s financial statements. Intragroup related party transactions and outstanding balances are eliminated in the preparation of consolidated financial statements of the group. Relationships between parents and subsidiaries should be disclosed irrespective of whether there have been transactions between those related parties. The entity should disclose the name of the entity s parent and, if different, the ultimate controlling party. If neither the entity s parent nor the ultimate controlling party produces financial statements available for public use, the name of the next most senior parent that does so should also be disclosed. To enable users of financial statements to form a view about the effects of related party relationships on the entity, it is appropriate to disclose the related party relationship when control exists, irrespective of whether there have been transactions between the related parties. The entity should disclose key management personnel compensation in total and for each of the following categories: (c) (d) (e) short-term employee benefits; post-employment benefits; other long-term benefits; termination benefits; and share-based payments. HKAS If there have been transactions between related parties, the entity should disclose the nature of the related party relationship as well as information about the transactions and outstanding balances necessary for an understanding of the potential effect of the relationship on the financial statements. As a minimum, disclosures should include: the amount of the transactions; the amount of outstanding balances; and (i) (ii) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and details of any guarantees given or received; (c) (d) provisions for doubtful debts related to the amount of outstanding balances; and the expense recognised during the period in respect of bad or doubtful debt due from related parties. 259

274 HKAS Presentation/Disclosure Requirement The disclosures required by paragraph 17 of HKAS 24 above should be made separately for each of the following categories: (c) (d) (e) (f) (g) the parent; entities with joint control or significant influence over the entity; subsidiaries; associates; joint ventures in which the entity is a venturer; key management personnel of the entity or its parent; and other related parties. HKAS HKAS Disclosures that related party transactions were made on terms equivalent to those that prevail in arm s length transactions are made only if such terms can be substantiated. Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting entity. Service concession arrangements HK(SIC) - Int 29.6 All aspects of a service concession arrangement should be considered in determining the appropriate disclosures in the notes to the financial statements. A Concession Operator and a Concession Provider should disclose the following in each period: (c) a description of the arrangement; significant terms of the arrangement that may affect the amount, timing and certainty of future cash flows (e.g. the period of the concession, re-pricing dates and the basis upon which repricing or re-negotiation is determined); the nature and extent (e.g. quantity, time period or amount, as appropriate) of: (i) (ii) (iii) (iv) (v) (vi) rights to use specified assets; obligations to provide or rights to expect provision of service; obligations to acquire or build items of property, plant and equipment; obligations to deliver or rights to receive specified assets at the end of the concession period; renewal and termination options; and other rights and obligations (e.g. major overhauls); and (d) changes in the arrangements occurring during the period. HK(SIC) - Int 29.7 Note: The disclosures required by paragraph 6 of HK(SIC) - Int 29 should be provided individually for each service concession arrangement or in aggregate for each class of service concession arrangements. A class is a grouping of service concession arrangements involving services of a similar nature (e.g. toll collections, telecommunications and water treatment services). 260

275 Presentation/Disclosure Requirement Consolidated financial statements are not prepared s124(2) Where a parent does not prepare consolidated financial statements because it is a wholly-owned subsidiary, the entity should disclose: the reasons why consolidated financial statements have not been presented, together with the bases on which subsidiaries are accounted for in the parent s separate financial statements; and the name and registered office of its parent that publishes consolidated financial statements. The Companies Ordinance requires the following additional information for subsidiaries omitted from group financial statements, or where group financial statements are not prepared: Sch 10: 18(4) the reasons for not consolidating a subsidiary; Sch 10: 8(4),(c) Sch 10: 18(5) the net aggregate amount attributable to the holding company of the profits less losses of such subsidiaries, dealt with this year and not so far dealt with, in the company s financial statements, both for: (i) (ii) the financial years of subsidiaries ending with or during the financial year of the company; their previous financial years since acquisition; and Sch 10: 18(4)(d) (c) any qualifications in the auditor s report and any note to the financial statements disclosing a matter which, in the absence of such disclosure, would have been referred to in an audit report qualification, to the extent that the matter is not referred to in the holding company s audit report and is material from the point of view of its members. Note: This note should be included in the immediate holding company s accounts, and in any other holding company s accounts. Separate financial statements HKAS When separate financial statements are prepared for a parent that, in accordance with paragraph 10 of HKAS 27 elects not to prepare consolidated financial statements, those separate financial statements should disclose: (c) (d) (e) the fact that the financial statements are separate financial statements; the fact that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with HKFRSs or IFRSs have been produced for public use, and the address where those consolidated financial statements are obtainable; a list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different proportion of voting power held; and a description of the method used to account for the investments listed under item (d) above. 261

276 HKAS Presentation/Disclosure Requirement When a parent (other than a parent covered by paragraph 41 of HKAS 27 (see above)), a venturer with an interest in a jointly controlled entity or an investor in an associate prepares separate financial statements, those separate financial statements should disclose: (c) (d) the fact that the statements are separate financial statements; the reasons why those statements are prepared if not required by law; a list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and a description of methods used to account for the investments listed in item (c) above. HKAS The separate financial statements referred to in paragraph 42 of HKAS 27 should identify the consolidated financial statements prepared in accordance with paragraph 9 of HKAS 27, HKAS 28 and HKAS 31 to which they relate. Capital disclosure HKAS 1.124A An entity shall disclose information that enables users of its financial statements to evaluate the entity s objectives, policies and processes for managing capital. To comply with paragraph 124A (see above), the entity discloses the following: HKAS 1.124B qualitative information about its objectives, policies and processes for managing capital, including (but not limited to): (i) (ii) (iii) a description of what it manages as capital; when an entity is subject to externally imposed capital requirements, the nature of those requirements and how those requirements are incorporated into the management of capital; and how it is meeting its objectives for managing capital; HKAS 1.124B summary quantitative data about what it manages as capital; HKAS 1.124B(c) (c) any changes in 124B and 124B (see above) from the previous period; HKAS 1.124B(d) (d) whether during the period it complied with any externally imposed capital requirements to which it is subject; and HKAS 1.124B(e) (e) when the entity has not complied with such externally imposed capital requirements, the consequences of such non-compliance. HKAS 1.124C When an aggregate disclosure of capital requirements and how capital is managed would not provide useful information or distorts a financial statement user s understanding of an entity s capital resources, the entity shall disclose separate information for each capital requirement to which the entity is subject. 262

277 Section 10 Accounting and reporting by retirement benefit plans (HKAS 26) Presentation/Disclosure Requirement Notes: This section of the checklist addresses HKAS 26, which should be applied in the reports of retirement benefit plans where such reports are prepared. Retirement benefit plans are sometimes referred to by various other names such as pension schemes, superannuation schemes or retirement benefit schemes. Retirement benefit plans are normally described as either defined contribution or defined benefit plans, each having their own distinctive characteristics. Occasionally plans exist that contain characteristics of both. Such hybrid plans are considered to be defined benefit plans for the purpose of HKAS 26. HKAS 26 regards a retirement benefit plan as a reporting entity separate from the employees of the participants of the plan. All other HKFRSs apply to the financial statements of retirement benefit plans to the extent that they are not superseded by HKAS 26. HKAS 26 complements HKAS 19 Employee Benefits, the Standard concerned with the determination of the cost of retirement benefits in the financial statements of employers having plans. HKAS 26 deals with accounting and reporting by the plan to all participants (as defined) as a group. It does not deal with reports to individual participants about their retirement benefit plans. HKAS 26 applies to defined contribution schemes and defined benefit schemes regardless of the creation or otherwise of a separate fund (which may or may not have a separate legal identity and may or may not have trustees) to which contributions are made and from which retirement benefits are paid. Retirement benefit plans with assets invested with insurance companies are subject to the same accounting and funding requirements as privately invested arrangements and, accordingly, are within the scope of HKAS 26 unless the contract with the insurance company is in the name of a specified participant or group of participants and the retirement benefit obligation is solely the responsibility of the insurance company. Defined contribution plans HKAS The financial statements of a defined contribution plan should contain: a statement of net assets available for benefits: and a description of the funding policy. The financial statements usually include: HKAS a description of significant activities for the period and the effect of any changes relating to the plan, and its membership and terms and conditions; HKAS statements reporting on the transactions and investment performance for the period and the financial position of the plan at the end of the period; and HKAS 26.16(c) (c) a description of the investment policies. Note: The disclosures set out in paragraph 16 of HKAS 26 (see above) are designed to achieve the primary objective of reporting by a defined contribution plan, i.e. to provide information about the plan and the performance of its investments. 263

278 Presentation/Disclosure Requirement Defined benefit plans The financial statements of a defined benefit plan should contain either: HKAS a statement that shows: (i) (ii) (iii) the net assets available for benefits; the actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits; and the resulting excess or deficit; or HKAS a statement of net assets available for benefits including either: (i) (ii) a note disclosing the actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits; or a reference to this information in an accompanying actuarial report. HKAS Note: If an actuarial valuation has not been prepared at the date of the financial statements, the most recent valuation should be used as a base. HKAS HKAS If an actuarial valuation has not been prepared at the date of the financial statements, the date of the most recent valuation that has been used should be disclosed. For the purposes of paragraph 17 of HKAS 26 (see above): the actuarial present value of promised retirement benefits should be based on the benefits promised under the terms of the plan on service rendered to date using either current salary levels or projected salary levels: and the basis used should be disclosed in the financial statements. HKAS HKAS HKAS The effect of any changes in actuarial assumptions that have had a significant effect on the actuarial present value of promised retirement benefits should be disclosed. The financial statements should explain the relationship between the actuarial present value of promised retirement benefits and the net assets available for benefits, and the policy for the funding of promised benefits. The financial statements should usually include: (c) (d) a description of significant activities for the period and the effect of any changes relating to the plan, and its membership and terms and conditions; statements reporting on the transactions and investment performance for the period and the financial position of the plan at the end of the period; actuarial information either as part of the statements or by way of a separate report; and a description of the investment policies. HKAS Note: The disclosures set out in paragraph 22 of HKAS 26 (see above) are designed to achieve the primary objective of reporting by a defined benefit plan, i.e. periodically to provide information about the financial resources and activities of the plan that is useful in assessing the relationships between the accumulation of resources and plan benefits over time. HKAS In addition to the disclosure of the actuarial present value of promised retirement benefits, sufficient explanation may need to be given so as to indicate clearly the context in which the actuarial present value of promised retirement benefits should be read. 264

279 Presentation/Disclosure Requirement HKAS Note: Such explanation may be in the form of information about the adequacy of the planned future funding and of the funding policy based on salary projections. This may be included in the financial statements or in the actuary s report. All plans HKAS HKAS Where plan investments are held for which an estimate of fair value is not possible, disclosure should be made of the reason why fair value is not used. To the extent that investments are carried at amounts other than market value or fair value, fair value is generally also disclosed. The financial statements of the retirement benefit information plan, whether defined benefit or defined contribution, should also contain the following: HKAS a statement of changes in net assets available for benefits; HKAS a summary of significant accounting policies; and HKAS 26.34(c) (c) a description of the plan and the effect of any changes in the plan during the period. The financial statements provided by retirement benefit plans include the following, if applicable: HKAS a statement of net assets available for benefits disclosing: (i) (ii) (iii) (iv) (v) assets at the end of the period suitably classified; the basis of valuation of assets; details of any single investment exceeding either 5% of the net assets available for benefits or 5% of any class or type of security; details of any investment in the employer; and liabilities other than the actuarial present value of promised retirement benefits; HKAS a statement of changes in net assets available for benefits showing the following: (i) (ii) (iii) (iv) (v) (vi) (vii) employer contributions; employee contributions; investment income such as interest and dividends; other income; benefits paid or payable (analysed, for example, as retirement, death and disability benefits, and lump sum payments); administrative expenses; other expenses; (viii) taxes on income; (ix) (x) profits and losses on disposal of investments and changes in value of investments; and transfers from and to other plans; HKAS 26.35(c) (c) a description of the funding policy; HKAS 26.35(d) (d) for defined benefit plans, the actuarial present value of promised retirement benefits (which may distinguish between vested benefits and non-vested benefits) based on the benefits promised under the terms of the plan, on service rendered to date and using either current salary levels or projected salary levels; and 265

280 Presentation/Disclosure Requirement HKAS 26.35(d) Note: This information may be included in an accompanying actuarial report to be read in conjunction with the related financial information. HKAS 26.35(e) (e) for defined benefit plans, a description of the significant actuarial assumptions made and the method used to calculate the actuarial present value of promised retirement benefits. The report of a retirement benefit plan contains a description of the plan, either as part of the financial information or in a separate report. It may contain the following : HKAS the names of the employers and the employee groups covered; HKAS the number of participants receiving benefits and the number of other participants, classified as appropriate; HKAS 26.36(c) (c) the type of plan - defined contribution or defined benefit; HKAS 26.36(d) (d) a note as to whether participants contribute to the plan; HKAS 26.36(e) (e) a description of the retirement benefits promised to participants; HKAS 26.36(f) (f) a description of any plan termination terms; and HKAS 26.36(g) (g) changes in items to (f) above during the period covered by the report. HKAS Note: It is not uncommon to refer to other documents that are readily available to users and in which the plan is described, and to include only information on subsequent changes in the report. 266

281 Section 11 Financial reporting in hyperinflationary economies (HKAS 29) Presentation/Disclosure Requirement Note: This section applies to the primary financial statements, including the consolidated financial statements, of any entity whose functional currency is the currency of a hyperinflationary economy. HKAS 29.8 HKAS 29.8 HKAS 29.9 HKAS The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy (whether based on a historical cost approach or a current cost approach) should be stated in terms of the measuring unit current at the balance sheet date. The corresponding figures for the previous period, and any information in respect of earlier periods, should be stated in terms of the measuring unit current at the balance sheet date. The gain or loss on the net monetary position should be included in net income and separately disclosed. The financial statements should disclose the following information: (c) the fact that the financial statements and the corresponding figures for previous periods have been restated for the changes in the general purchasing power of the functional currency and, as a result, are stated in terms of the measuring unit current at the balance sheet date; whether the financial statements are based on a historical cost or current cost approach; and the identity and level of the price index at the balance sheet date and the movement in the index during the current and the previous reporting period. HKAS When the economy has ceased to be hyperinflationary, and the entity has discontinued the preparation and presentation of financial statements prepared in accordance with HKAS 29, the entity should treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements. 267

282 Section 12 Agriculture (HKAS 41) Presentation/Disclosure Requirement General disclosures HKAS HKAS HKAS HKAS HKAS HKAS The entity should disclose the aggregate gain or loss arising during the current period on initial recognition of biological assets and agricultural produce, and from the change in fair value less estimated point-of-sale costs of biological assets. The entity should provide a description of each group of biological assets, either in narrative form or as a quantified description. The entity is encouraged to provide a quantified description of each group of biological assets, distinguishing between consumable and bearer biological assets or between mature and immature biological assess, as appropriate. The entity discloses the basis for making the distinctions between consumable and bearer biological assets, or between mature and immature biological assets, as appropriate. If not disclosed elsewhere in information published with the financial statements, the entity should describe: the nature of its activities involving each group of biological assets; and non-financial measures or estimates of the physical quantities of: (i) (ii) each group of the entity s biological assets at the end of the period; and output of agricultural produce during the period. HKAS HKAS HKAS The entity should disclose the methods used and significant assumptions applied in determining the fair value of each group of agricultural produce at the point of harvest, and each group of biological assets. The entity should disclose the fair value less estimated point-of-sale costs of agricultural produce harvested during the period, determined at the point of harvest. The entity should disclose: (c) the existence and carrying amounts of biological assets whose title is restricted, and the carrying amounts of biological assets pledged as security for liabilities; the amount of commitments for the development or acquisition of biological assets; and financial risk management strategies related to agricultural activity. HKAS The entity should present a reconciliation of changes in the carrying amount of biological assets between the beginning and the end of the current period, including: (c) (d) (e) (f) (g) the gain or loss arising from changes in fair value less estimated point-of-sale costs; increases due to purchases; decreases due to sales and biological assets classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with HKFRS 5; decreases due to harvest; increases resulting from business combinations; net exchange differences arising on the translation of the financial statements into a different presentation currency, and on the translation of a foreign operation into the presentation currency of the reporting entity; and other changes. 268

283 HKAS Presentation/Disclosure Requirement When there is a production cycle of more than one year, the entity is encouraged to disclose separately, by group or otherwise, the amount of change in fair value less estimated point-of-sale costs of biological assets included in profit or loss due to physical changes and due to price changes. Note: The fair value less estimated point-sale costs of a biological asset can change due to both physical changes and price changes in the market. Separate disclosure of physical and price changes is useful in appraising current period performance and future prospects, particularly when there is a production cycle of more than one year This information is generally less useful when the production cycle is less than one year (e.g. when raising chickens or growing cereal crops). HKAS If an event occurs that gives rise to a material item of income or expense, the nature and amount of that item are disclosed in accordance with HKAS 1 Presentation of Financial Statements. Note: Agricultural activity is often exposed to climatic, disease and other natural risks. Examples include an outbreak of a virulent disease, a flood, severe droughts or frosts, and a plague of insects. Additional disclosures for biological assets where fair value cannot be measured reliably HKAS If the entity measures biological assets at their cost less any accumulated depreciation and any accumulated impairment losses at the end of the period, the entity should disclose for such biological assets: (c) (d) (e) (f) a description of the biological assets; an explanation of why fair value cannot be measured reliably; if possible, the range of estimates within which fair value is highly likely to lie; the depreciation method used; the useful lives or the depreciation rates used; and the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period. HKAS HKAS If, during the current period, the entity measures biological assets at their cost less any accumulated depreciation and any accumulated impairment losses, the entity should disclose any gain or loss recognised on disposal of such biological assets and the reconciliation required by paragraph 50 of HKAS 41 (see above) (amounts related to such biological assets should be disclosed separately). In the circumstances described in paragraph 55 of HKAS 41 (see above), the reconciliation should also include the following amounts included in net profit or loss related to those biological assets: (c) impairment losses; reversals of impairment losses; and depreciation. HKAS If the fair value of biological assets previously measured at their cost less any accumulated depreciation and any accumulated impairment losses becomes reliably measurable during the current period, the entity should disclose for those biological assets: (c) a description of the biological assets; an explanation of why fair value has become reliably measurable; and the effect of the change. 269

284 Presentation/Disclosure Requirement Government grants HKAS The entity should disclose the following related to agricultural activity covered by HKAS 41: (c) the nature and extent of government grants recognised in the financial statements. unfulfilled conditions and other contingencies attaching to government grants; and significant decreases expected in the level of government grants. 270

285 Section 13 First-time adoption of HKFRSs (HKFRS 1) Presentation/Disclosure Requirement Notes: 1. HKFRS 1 First-time Adoption of Hong Kong Financial Reporting Standards (HKFRSs) sets out the procedures that an entity must follow when it adopts HKFRSs for the first time as the basis for preparing its general purpose financial statements. HKFRS The entity should apply HKFRS 1 in: its first HKFRS financial statements; and each interim financial report, if any, that it presents under HKAS 34 Interim Financial Reporting for part of the period covered by its first HKFRS financial statements. HKFRS The entity s first HKFRS financial statements are the first annual financial statements in which the entity adopts HKFRSs, by an explicit and unreserved statement in those financial statements of compliance with HKFRSs. HKFRS 1.7 HKFRS The entity should use the same accounting policies in its opening HKFRS balance sheet and throughout all periods presented in its first HKFRS financial statements. Those accounting policies should comply with each HKFRS effective at the reporting date (the end of the latest period covered by financial statements) for its first HKFRS financial statements, except as specified in paragraphs of HKFRS 1. The transitional provisions in other HKFRSs do not apply to a first-time adopter s transition to HKFRSs, except as specified in paragraphs 25D, 34A and 34B of HKFRS 1. HKFRS However, the entity may apply a new HKFRS that is not yet mandatory if that HKFRS permits early adoption. HKFRS HKFRS 1 does not provide exemptions from the presentation and disclosure requirements in other HKFRSs. Opening HKFRS balance sheet HKFRS 1.6 The entity should prepare an opening HKFRS balance sheet at the date of transition to HKFRSs. The entity does not need to present its opening HKFRS balance sheet in its first HKFRS financial statements. The date of transition to HKFRSs is the beginning of the earliest period for which an entity presents its full comparative information under HKFRSs in its first HKFRS financial statements. Reclassification HKFRS 1.10(c) The entity should reclassify items that it recognised under the previous GAAP as one type of asset, liability or component of equity but are a different type of asset, liability or component of equity under HKFRSs. Comparative information HKFRS 1.36 The entity s first HKFRS financial statements should include at least one year of comparative information under HKFRSs. Exemption from the requirement to restate comparative information for HKAS 32, HKAS 39 and HKFRS 4 The entity that adopts HKFRSs before 1 January 2006, and chooses to present comparative information that does not comply with HKAS 32 Financial Instruments: Presentation, HKAS 39 Financial Instruments: Recognition and Measurement and HKFRS 4 Insurance Contracts in its first year of transition, should: 271

286 Presentation/Disclosure Requirement HKFRS 1.36A apply its previous GAAP in the comparative information to financial instruments within the scope of HKAS 32 and HKAS 39 and to insurance contracts within the scope of HKFRS 4; HKFRS 1.36A disclose that fact; HKFRS 1.36A (c) disclose the basis used to prepare the comparative information under previous GAAP; and HKFRS 1.36A(c) (d) disclose the nature of the main adjustments that would make the information comply with HKAS 32, HKAS 39 and HKFRS 4. Notes: HKFRS 1.36A 1. This exemption is not available to entities adopting HKFRSs for the first time on or after 1 January HKFRS 1.36A(c) 2. When disclosing the nature of the adjustments that would make the information comply with the relevant Standards, the entity need not quantify those adjustments. HKFRS 1.36A(c) 3. For entities choosing to present comparative information that does not comply with HKAS 32, HKAS 39 and HKFRS 4, references to the date of transition to HKFRSs should mean, in the case of those Standards only, the beginning of the first HKFRS reporting period. HKFRS 1.36A(c) HKFRS 1.36A(c) Where the exemption from presentation of comparative information in accordance with the relevant Standards is taken, any adjustment between the balance sheet at the comparative period s reporting date (i.e. the balance sheet that includes comparative information under previous GAAP) and the balance sheet at the start of the first HKFRS reporting period (i.e. the first period that includes information that complies with HKAS 32, HKAS 39 and HKFRS 4) should be treated as arising from a change in accounting policy. In respect of the adjustments treated as changes in accounting policies, the entity should provide the disclosures required by paragraphs 28 to (e) and (f)(i) of HKAS 8 Accounting Policies, Changes in Accounting Estimate and Errors (see relevant section of this checklist). Note: Paragraph 28(f)(i) of HKAS 8 applies only to amounts presented in the balance sheet at the comparative period s reporting date. Exemption from the requirement to present comparative disclosures under HKFRS 6 The entity that adopts HKFRSs before 1 January 2006 and that chooses to adopt HKFRS 6 Exploration for and Evaluation of Mineral Resources before 1 January 2006 need not present the disclosures required by HKFRS 6 for comparative periods in its first HKFRS financial statements. Note: HKFRS 6 is effective for accounting periods beginning on or after 1 January 2006, but earlier adoption is encouraged. This exemption is not available to entities adopting HKFRSs for the first time on or after 1 January Historical summaries HKFRS 1.37 If the financial statements contain historical summaries or comparative information under the previous GAAP, the entity should: Note: label the previous GAAP information prominently as not being prepared under HKFRSs; and disclose the nature of the main adjustments which would make it comply with HKFRSs. An entity does not need to quantify those adjustments. If the entity wishes to disclose summaries of selected financial information for periods before the date of the opening HKFRS balance sheet, that information is not required to comply with the recognition and measurement requirements of HKFRSs. 272

287 Presentation/Disclosure Requirement Explanation of transition to HKFRSs HKFRS 1.38 The entity should explain how the transition from the previous GAAP to HKFRS affected its reported financial position, financial performance and cash flows. Reconciliations HKFRS 1.39 The entity s first HKFRS financial statements should include: reconciliations of its equity reported under the previous GAAP to its equity under HKFRSs for both of the following dates: (i) (ii) the date of transition to HKFRSs; and the end of the latest period presented in the entity s most recent annual financial statements under the previous GAAP; (c) a reconciliation of the profit or loss reported under the previous GAAP for the latest period in the entity s most recent annual financial statements to its profit or loss under HKFRSs for the same period; and if the entity recognised or reversed any impairment losses for the first time in preparing its opening HKFRS balance sheet, the disclosures that HKAS 36 Impairment of Assets would have been required if the entity had recognised those impairment losses or reversals in the period beginning with the date of transition to HKFRSs. Designation of financial assets or financial liabilities HKFRS 1.43A If the entity has designated any previously recognized financial assets or financial liabilities as at fair value through profit or loss or as available-for-sale (as permitted by paragraph 25A of HKFRS 1), the following should be disclosed: the fair value of any financial assets or financial liabilities designated into each category at the date of designation; and the classification and carrying amount in the previous financial statements. HKFRS 1.40 HKFRS 1.41 HKFRS 1.43 The reconciliation required by paragraph 39 and of HKFRS 1 (see above) should give sufficient detail to enable users to understand the material adjustments to the balance sheet, income statement and cash flow statement. If the entity becomes aware of errors made under the previous GAAP, the reconciliation required by paragraph 39 and of HKFRS 1 (see above) should distinguish the correction of those errors from changes in accounting policies. If the entity did not present financial statements for the previous periods, its first HKFRS financial statements should disclose that fact. Use of fair value as deemed cost HKFRS 1.44 If the entity uses fair value in its opening HKFRS balance sheet as deemed costs for an item of property, plant and equipment, an investment property or an intangible asset (see paragraphs 16 and 18 of HKFRS 1), the entity s first HKFRS financial statements should disclose, for each line item in the opening HKFRS balance sheet: the aggregate of those fair values; and the aggregate adjustment to the carrying amounts reported under the previous GAAP. Effective date and transition HKFRS 1.47 If an entity s first HKFRS financial statements are for a period beginning on or after 1 January 2004, it should apply this HKFRS. Earlier adoption is encouraged. Where an entity opts for early adoption, disclosure of that fact is required. 273

288 Presentation/Disclosure Requirement Interim financial reports HKFRS 1.45 To comply with paragraph 38 of HKFRS 1, if an entity presents an interim financial report under HKAS 34 Interim Financial Reporting for part of the period covered by its first HKFRS financial statements, the entity should satisfy the following requirements in addition to the requirements to HKAS 34. each such interim financial report should, if the entity presents an interim financial report for the comparable interim period of the immediately preceding financial year, include reconciliations of: (i) (ii) its equity under previous GAAP at the end of that comparable interim period to its equity under HKFRSs at that date; and its profit or loss under previous GAAP for that comparable interim period (current and year-to-date) to its profit or loss under HKFRSs for that period; in addition to the reconciliations required by, the entity s first interim financial report under HKAS 34 for part of the period covered by its first HKFRS financial statements should include the reconciliations described in paragraph 39 and of HKFRS 1 (supplemented by the details required by paragraphs 40 and 41 of HKFRS 1) or a cross-reference to another published document that includes those reconciliations; and HKAS (c) as required by HKAS 34, the entity should disclose the nature and effect of any changes in accounting policies compared to those under previous GAAP. HKFRS 1.46 Note: HKAS 34 generally requires minimum disclosures, which are based on the assumption that users of the interim financial report also have access to the most recent annual financial statements. However, HKAS 34 also requires an entity to disclose any events or transactions that are material to an understanding of the current interim period. Therefore, if a first-time adopter did not, in its most recent annual financial statements under previous GAAP, disclose information material to an understanding of the current interim period, its interim financial report should disclose that information or include a cross-reference to another published document that includes it. 274

289 Section 14 Insurance contracts (HKFRS 4) Presentation/Disclosure Requirement Notes: 1. This section of the checklist addresses HKFRS 4, which specifies the financial reporting for insurance contracts by an entity that issues such contracts (described as an insurer). 2. An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policy holder) by agreeing to compensate the policy holder if a specified uncertain future event (the insured event) adversely affects the policy holder. Refer to Appendix B of HKFRS 4 for an extended discussion of the definition of an insurance contract, and to paragraphs 2 to 12 of HKFRS 4 for the specific rules as regards the scope of the Standard. 3. Note that the Implementation Guidance accompanying HKFRS 4 clarifies a number of the disclosure requirements, and contains extensive guidance on possible ways to meet the disclosure requirements in paragraphs 36 to 39 of HKFRS 4. Exemption from disclosure of comparative information for periods beginning before 1 January 2005 HKFRS 4.42 Entities need not apply the disclosure requirements in HKFRS 4 (set out below) to comparative information that relates to annual periods beginning before 1 January 2005, except for the disclosures required by paragraphs 37 and 37 of HKFRS 4 (see below) about accounting policies, and recognised assets, liabilities, income and expense (and cash flows if the direct method is used). Disclosure of non-compliance, on the basis of impracticability, with recognition and measurement rules for comparative information for periods beginning before 1 January 2005 HKFRS 4.43 If it is impracticable to apply a particular requirement of paragraphs 10 to 35 of HKFRS 4 (dealing with unbundling of deposit components, and recognition and measurement) to comparative information that relates to annual periods beginning before 1 January 2005, the entity should disclose that fact. HKFRS 4.43 Note: HKFRS 4 notes that applying the liability adequacy test (paragraphs 15 to 19 of HKFRS 4) to such comparative information might sometimes be impracticable, but it is highly unlikely to be impracticable to apply other requirements of paragraphs 10 to 35 of HKFRS 4 to such comparative information. HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors explains the term impracticable. Insurance contracts acquired in a business combination or portfolio transfer HKFRS 4.31 To comply with HKFRS 3 Business Combinations, an insurer should, at the acquisition date, measure at fair value the insurance liabilities assumed and insurance assets acquired in a business combination. However, an insurer is permitted, but not required, to use an expanded presentation that splits the fair value of acquired insurance contracts into two components: a liability measured in accordance with the insurer s accounting policies for insurance contracts that it issues; and an intangible asset, representing the difference between (i) the fair value of the contractual insurance rights acquired and insurance obligations assumed, and (ii) the amount described in above. 275

290 Presentation/Disclosure Requirement Notes: HKFRS The subsequent measurement of any intangible asset separately identified in accordance with the alternative permitted under paragraph 31 of HKFRS 4 should be consistent with the measurement of the related insurance liability. HKFRS An insurer acquiring a portfolio of insurance contracts may also use the expanded presentation permitted by paragraph 31 of HKFRS 4. Discretionary participation features in financial instruments HKFRS 4.35 Where the entity is the issuer of a financial instrument that contains a discretionary participation feature as well as a guaranteed element, in applying the rules set out in paragraph 35 of HKFRS 4, the entity need not disclose the amount that would result from applying HKAS 39 to the guaranteed element, nor need it present that amount separately. Explanation of recognised amounts HKFRS 4.36 The insurer should disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. Note: Paragraph 37 of HKFRS 4 specifies the minimum disclosures required to satisfy this requirement. The insurer should disclose: HKFRS 4.37 its accounting policies for insurance contracts and related assets, liabilities, income and expense; HKFRS 4.37 the recognised assets, liabilities, income and expense (and, if it presents its cash flow statement using the direct method, cash flows) arising from insurance contracts; HKFRS 4.37 (c) if the insurer is a cedant (i.e. the policy holder under a reinsurance contract): (i) (ii) gains and losses recognised in profit or loss on buying reinsurance; and if the cedant defers and amortises gains and losses arising on buying reinsurance, the amortisation for the period and the amounts remaining unamortised at the beginning and end of the period; HKFRS 4.37(c) (d) the process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts described in accordance with paragraph 37 of HKFRS 4; HKFRS 4.37(c) Note: When practicable, an insurer should also give quantified disclosure of those assumptions. HKFRS 4.37(d) (e) the effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements; and HKFRS 4.37(e) (f) reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs. 276

291 Presentation/Disclosure Requirement Amount, timing and uncertainty of cash flows HKFRS 4.38 The insurer should disclose information that helps users to understand the amount, timing and uncertainty of future cash flows from insurance contracts. Note: Paragraph 39 of HKFRS 4 specifies the minimum disclosures required to satisfy this requirement. The insurer should disclose: HKFRS 4.39 its objectives in managing risks arising from insurance contracts and its policies for mitigating those risks; HKFRS 4.39 those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurer s future cash flows; HKFRS 4.39(c) (c) information about insurance risk (both before and after risk mitigation by reinsurance), including information about: (i) (ii) (iii) the sensitivity of profit or loss and equity to changes in variables that have a material effect on them; concentrations of insurance risk; actual claims compared with previous estimates (i.e. claims development); Notes: HKFRS 4.39(c) 1. The disclosure about claims development should go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year. HKFRS In applying paragraph 39(c)(iii) of HKFRS 4, an entity need not disclose information about claims development that occurred earlier than five years before the end of the first financial year in which it applies HKFRS 4. HKFRS 4.39(d) (d) the information about interest rate risk and credit risk that HKAS 32 Financial Instruments: Presentation would require if the insurance contracts were within the scope of HKAS 32; and HKFRS 4.39(e) (e) information about exposures to interest rate risk or market risk under embedded derivatives contained in a host insurance contract if the insurer is not required to, and does not, measure the embedded derivatives at fair value. HKFRS 4.14(d) Offsetting An insurer shall not offset: a) reinsurance assets against the related insurance liabilities; or b) income or expense from reinsurance contracts against the expense or income from the related insurance contracts. Adoption of standard before effective date HKFRS 4.41 If the entity has applied HKFRS 4 for a period beginning before 1 January 2005, it should disclose that fact. 277

292 Section 15 Exploration for and evaluation of mineral resources (HKFRS 6) Presentation/Disclosure Requirement Classification of exploration and evaluation assets HKFRS 6.15 An entity should classify exploration and evaluation assets as tangible or intangible according to the nature of the assets acquired, and apply the classification consistently. HKFRS 6.16 Note: Some exploration and evaluation assets are treated as intangible (e.g. drilling rights), whereas others are tangible (e.g. vehicles and drilling rigs). To the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption is part of the cost of the intangible asset. However, using a tangible asset to develop an intangible asset does not change a tangible asset into an intangible asset. Reclassification of exploration and evaluation assets HKFRS 6.17 An exploration and evaluation asset should no longer be classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Note: Exploration and evaluation assets should be assessed for impairment, and any impairment loss recognised, before reclassification. Impairment HKFRS 6.18 An entity should present and disclose any impairment loss recognised in respect of exploration and evaluation assets in accordance with HKAS 36 Impairment of Assets. Other disclosures HKFRS 6.23 An entity should disclose information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources. Note: Paragraphs 24 and 25 of HKFRS 6, set out below, specify the minimum disclosures required to satisfy this requirement. HKFRS 6.24 HKFRS 6.25 An entity should disclose the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources. An entity should treat exploration and evaluation assets as a separate class of assets and make the disclosures required by either HKAS 16 Property, Plant and Equipment, or HKAS 38 Intangible Assets, consistent with how the assets are classified. Disclosure of exemption from applying impairment rules to comparative information that relates to periods beginning before 1 January 2006 HKFRS 6.27 If it is impracticable to apply a particular requirement of paragraph 18 of HKFRS 6 to comparative information that relates to annual periods beginning before 1 January 2006, the entity should disclose that fact. Note: The general requirement as regards impairment testing on the adoption of HKFRS 6 is that entities recognising exploration and evaluation assets should determine whether there were any facts and circumstances indicating impairment in prior periods. Any identified impairment should generally be recognised retrospectively. However, where it is impracticable to apply the impairment rules to comparative information that related to an annual period beginning before 1 January 2006, the rules need not be applied retrospectively, provided that the entity discloses that fact. HKAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, explains the term impracticable. 278

293 Section 16 Additional matters for listed entities Presentation/Disclosure Requirement Analysis of the group s performance App GR A separate statement is required, containing a discussion and analysis of the entity s performance during the year and the material factors underlying its results and financial position. The statement should emphasise trends and identify significant events or transactions during the year under review. As a minimum, the directors of the entity should address all of the following points: the entity s liquidity and financial resources. This may include comments on the level of borrowings at the balance sheet date, the seasonality of borrowing requirements, and the maturity profile of borrowings and committed borrowing facilities. Reference may also be made to the funding requirements for capital expenditure commitments and authorisations; the capital structure of the entity in terms of maturity profile of debt and obligation, type of capital instruments used, currency and interest rate structure; the discussion may cover: (i) (ii) (iii) (iv) (v) funding and treasury policies and objectives in terms of the manner in which treasury activities are controlled; the currencies in which borrowings are made and in which cash and cash equivalents are held; the extent to which borrowings are at fixed interest rates; the use of financial instruments for hedging purposes; and the extent to which foreign currency net investments are hedged by currency borrowings and other hedging instruments; (c) (d) (e) (f) (g) (h) (i) the state of the entity s order book (where applicable) and prospects for new business including new products and services introduced or announced; significant investments held, their performance during the year and their future prospects; details of material acquisitions and disposals of subsidiaries and associates in the course of the year; comments on segment information. This may cover changes in industry segments, developments within each segment and their effect on the results of that segment. It may also include changes in market conditions, new products and services introduced or announced and their impact on the entity s performance and changes in turnover and margins; where applicable, details of the number and remuneration of employees, remuneration policies, bonus and share option schemes and training schemes; details of charges on entity assets; details of future plans for material investments or capital assets and their expected sources of funding in the coming year; App 16 Note 32.1 GR Note 1 Note: (j) It is the responsibility of the directors to determine what investment or capital asset is material in the context of the entity s business, operations and financial performance. The materiality of an investment or a capital asset varies from one entity to another according to its financial performance, assets and capitalisation, the nature of its operations and other factors. gearing ratio; App 16 Note 32.2 GR Note 2 Note: The basis on which the gearing ratio is computed should be disclosed. 279

294 Presentation/Disclosure Requirement (k) (l) exposure to fluctuations in exchange rates and any related hedges; and details of contingent liabilities, if any. App GR The entity is encouraged to disclose the following additional commentary on management discussion and analysis in the annual reports: (c) (d) (e) (f) (g) (h) (i) efficiency indicators (e.g. return on equity, working capital ratios) for the last five financial years indicating the bases of computation; industry specific ratios, if any, for the last five financial years indicating the bases of computation; a discussion of the purpose, corporate strategy and principal drivers of performance; an overview of trends in the industry and business; a discussion on business risks (including known events, uncertainties and other factors which may substantially affect future performance) and risks management policy; a discussion on the environmental policies and performance, including compliance with the relevant laws and regulations; a discussion on the policies and performance on community, social, ethical and reputational issues; an account of the key relationships with employees, customers, suppliers and others, on which its success depends; and receipts from, and returns to, shareholders. Notes: 1. Both Main Board and GEM listed entities are required to address each of the points set out in App 16.32/GR (see above) and are encouraged to address the points set out in App 16.52/GR (see above). 2. Additional guidance on the recommended content for a MD&A can be found in the HKICPA s Corporate Governance Disclosure in Annual Reports and the Reference for Disclosures in Annual Reports issued by the SEHK. Convertible and redeemable securities App 16.10(1) GR App 16.10(2) GR App 16.10(3) GR App 16.10(4) GR The entity should disclose details of the classes, numbers and terms of any convertible securities, options, warrants or similar rights issued or granted by the company or any of its subsidiaries during the year, together with the consideration received by the company or any of its subsidiaries. The entity should disclose particulars of any exercise made during the financial year of any conversion or subscription rights under any convertible securities, options, warrants or similar rights issued or granted at any time by the company or any of its subsidiaries. The annual report should disclose particulars of any redemption or purchase or cancellation by the company, or any of its subsidiaries, of the redeemable securities of the company, and the amount of such securities outstanding at the balance sheet date. The annual report should disclose particulars of any purchase, sale or redemption by the company, or any of its subsidiaries, of the listed securities of the company during the year, or an appropriate negative statement. 280

295 Presentation/Disclosure Requirement Notes: App 16.10(4) GR App 16.10(4) GR The statement required above should distinguish between those listed securities that are purchased by the company (and, for Hong Kong companies, therefore cancelled) and those that are purchased by a subsidiary of the company. 2. The statement required above should include the aggregate price paid or received by the company for such purchases, sales or redemptions and should distinguish between those securities purchased or sold: (c) (d) on the SEHK; on another stock exchange; by private arrangement; and by way of a general offer. LR 10.06(4) GR 13.13(2) The annual report should: make reference to purchases of shares made during the year and the reasons for them; and include a monthly breakdown of purchases of shares made during the year, showing the number of shares purchased each month and the purchase price per share or the highest and lowest price paid for all such purchases, where relevant, and the aggregate price paid by the company for such purchases. Interests and short positions in shares Part XV of the Securities and Futures Ordinance (SFO) deals with the notification of interests and short positions held by directors and chief executives, and substantial shareholders, to the listed entity concerned and to the SEHK, and with the requirements for the listed entity to keep registers of such interests and short positions. Correspondingly, the Listing Rules and GEM Rules have set out annual report disclosure requirements. In particular, separate disclosure is required of: (c) the interests and short positions in any shares, underlying shares and debentures of the company or any of its associated corporations, held by directors and chief executives at the end of the financial period; the interests and short positions in the voting shares and underlying voting shares of the company, held by substantial shareholders at the end of the financial period; and the interests and short positions notified to the company and to the SEHK by other persons in accordance with the requirements of the SFO. Directors and chief executives interests and short positions in shares App 16.13(1) GR 18.15(1) A statement is required at the end of the financial period showing: the interests of each director and chief executive of the company in any shares, underlying shares and debentures of the company or any of its associated corporations; and the short positions of each director and chief executive of the company in any shares, underlying shares and debentures of the company or any of its associated corporations, as recorded in the register required to be kept under section 352 of the SFO or as otherwise notified to the company and the SEHK pursuant to the Model Code for Securities Transactions by Directors of Listed Companies for Main Board listed entities (for GEM listed entities - the required standard of dealings by directors as referred to is in GR 5.46) or, if there are no such interests or short positions, a statement of that fact. App 16.13(2) GR 18.15(2) The statement required by App 16.31(1)/GR 18.15(1) should specify the company in which each interest or short position is held, the class to which the securities belong, and the number of such securities held. 281

296 PN 5(3.2) GR PN 5(3.3) GR 18.17A Presentation/Disclosure Requirement The statement required by App 16.31(1)/GR 18.15(1) should describe the capacity in which each interest or short position is held, and the nature of the interest or short position, as disclosed in the prescribed form used by the director or chief executive when notifying the company and the SEHK of the interest or short position. The following details are required to be disclosed for each director and chief executive: the aggregate long position in any shares and underlying shares and in debentures, showing separately: (i) (ii) (iii) interests in shares (other than interests held under equity derivatives); interests in underlying shares held under equity derivatives (e.g. share options, warrants), specifying whether they are listed or unlisted, and whether they are to be settled by shares, by cash or by some other methods; and interests in debentures, including convertible bonds and other debt securities; and the aggregate short position in any shares, underlying shares and debentures, showing separately: (i) (ii) short positions in respect of shares arising under a stock borrowing and lending agreement; and short positions in underlying shares held under equity derivatives, specifying whether they are listed or unlisted, and whether they are to be settled by shares, by cash or by some other methods. PN 5(3.3) GR PN 5(3.3)(1) Note 1 PN 5(3.3)(2) Note 1 GR 18.17A(1) Note 1 GR 18.17A(2) Note 1 PN 5(3.2) GR PN 5(4) App 16 Note 13.2 GR Note App 16.13(2) GR 18.15(2) The information required by PN 5(3.3)/GR 18.17A (see above) is required to be separately disclosed for each entity in which an interest or a short position is held. The percentages of the issued share capital of the company or its associated corporation, which the aggregate long position or the aggregate short position in shares represents, should be disclosed. Where interests or short positions are held through corporations that are not wholly-owned by the director or chief executive, the percentage interests held by the director or chief executive in such corporations should be disclosed. Particulars should be given of the extent of any duplication that occurs, between the interests of directors, chief executives, substantial shareholders, and their associates. Where interests arising from the holding of securities as qualifying shares are not disclosed pursuant to the exception allowed in App 16.13(2)/GR 18.15(2), a general statement should be made to indicate that the directors or chief executives hold qualifying shares. Note: App 16.13(2)/GR 18.15(2) allow that non-beneficial interests of directors and chief executives need not be disclosed if they are holdings of qualification shares or if the interest is held solely for the purpose of ensuring that the relevant subsidiary has more than one member and there is a legally enforceable declaration of trust in favour of the parent company of that subsidiary. PN 5(3.3)(1) Note 3 GR 18.17A(1) Note 3 Where share options are granted to directors and chief executives, particulars of the share options and movements as required under LR 17.07(1)/GR 23.07(1) (see below) should be disclosed. 282

297 Presentation/Disclosure Requirement Notes: SFO Schedule 1 1. For these purposes, a director includes a shadow director and any person occupying the position of director by whatever name called. A shadow director means a person in accordance with whose directions or instructions the directors of a company are accustomed to act. SFO s For these purposes, a chief executive means a person employed or otherwise engaged by a corporation who, either alone or together with one or more persons, is or will be responsible, under the immediate authority of the board of directors, for the conduct of the business of the corporation. SFO s Associated corporation means a corporation: which is a subsidiary or holding company of the company or a subsidiary of the company s holding company; or (not being a subsidiary of the company) in which the company has an interest in the shares of a class of exceeding 20% of the nominal value of the issued shares of that class. SFO s344(1) SFO s344(2) SFO s344(3) SFO s344(4) SFO s346 SFO s345(4) SFO s345(4) PN 5(3.3)(1) Note 2 GR 18.17A(1) Note 2 4. Interests and short positions of a director or a chief executive extend to include interests held by the following persons and trusts: his or her spouse; his or her children under the age of 18; their respective controlled companies (with control of management or one third of the voting rights, either directly or indirectly through another corporation in which they control one third of the voting rights); persons having a joint interest or short position with him or her; a trust, if he or she is a trustee of the trust (other than a trust where he or she is a bare trustee); a discretionary trust, if he or she is a founder of the trust; or a trust, if he or she is a beneficiary. 5. A long position under an equity derivative arises where a person is a party to an equity derivative, by virtue of which the person: has a right to take the underlying shares; is under an obligation to take the underlying shares; has a right to receive money if the price of the underlying shares increases; or has a right to avoid or reduce a loss if the price of the underlying shares increases. PN 5(3.3)(2) Note 2 GR 18.17A(2) Note 2 6. A short position arises: (i) (ii) where the person is the borrower of shares under a securities borrowing and lending agreement, or has an obligation to deliver the underlying shares to another person who has lent shares; where the person is the holder, writer or issuer of any equity derivatives, by virtue of which the person: 283

298 Presentation/Disclosure Requirement (c) (d) has a right to require another person to take the underlying shares of the equity derivatives; is under an obligation to deliver the underlying shares of the equity derivatives to another person; has a right to receive from another person money if the price of the underlying shares declines; or has a right to avoid a loss if the price of the underlying shares declines. App 16.13(1) GR 18.15(1) 7. Compliance with the requirements in respect of the interests and short positions of each director and chief executive in any associated corporation may be modified or waived if, in the opinion of the SEHK, full disclosure would result in particulars being given which are not material in the context of the entity and are of excessive length. Substantial shareholders interests and short positions in shares App 16.13(3) GR PN 5(3.2) GR PN 5(3.4) GR 18.17B A statement is required, as at the end of the financial period, showing interests and short positions in the shares and underlying shares of the company, other than those of the directors and chief executives, as recorded in the register required to be kept under section 336 of the SFO, and the amount of such interests and short positions or, if there is no such interest or short position recorded in the register, a statement of that fact. The statement required by App 16.13(3)/GR (see above) should describe the capacity in which each interest or short position is held, and the nature of the interest or short position, as disclosed in the prescribed form used by the substantial shareholder when notifying the company and the SEHK of the interest or short position. The following details are required to be disclosed for each substantial shareholder: the aggregate long position in the shares and underlying shares of the company, showing separately: (i) (ii) interests in shares (other than interests held under equity derivatives); and interests in underlying shares held under equity derivatives (e.g. share options, warrants) specifying whether they are listed or unlisted, and whether they are to be settled by shares or by cash; and the aggregate short position in shares and underlying shares of the company, showing separately: (i) short positions in respect of shares arising under a stock borrowing and lending agreement; and (ii) short positions in underlying shares under equity derivatives, specifying whether they are listed or unlisted, and whether they are to be settled by shares or by cash. PN 5(3.4)(1) Note 2 PN 5(3.4)(2) Note 1 GR 18.17B(1) Note 1 GR 18.17B(2) Note 1 PN 5(3.2) GR PN 5(3.4)(1) Note 4 GR 18.17B(1) Note 3 The percentages of the issued share capital of the company, which the aggregate long position or the aggregate short position in shares represents, should be disclosed. Where interests or short positions are held through corporations that are not wholly-owned by the substantial shareholder, the percentage interests held by the substantial shareholder should be disclosed. Where share options are granted to substantial shareholders, particulars of the share options and movements as required under LR 17.07(1)/GR 23.07(1) should be disclosed (see below). 284

299 Presentation/Disclosure Requirement Notes: SFO s311(3) SFO s315(1) SFO s313(5) SFO s315(2) 1. A duty to disclose under this section arises where a person has a notifiable interest. A person has a notifiable interest at any time where he is interested in shares comprised in the relevant share capital of the company with an aggregate nominal value representing not less than 5%, or such other percentage prescribed by regulations, of the issued equity share capital. 2. A duty to disclose short positions arises where a person has a notifiable interest (as defined in the previous paragraph), and has a short position in shares comprised in the relevant share capital of the company, representing not less than 1%, or such other percentage prescribed by regulations, of the issued equity share capital. SFO s Relevant share capital means the company s issued share capital of a class which carry rights to vote in all circumstances at general meetings of the corporation, including unissued shares in the company s share capital of a class which, if issued, would carry rights to vote in all circumstances at general meetings of the company. SFO s Issued equity share capital means the company s issued share capital of a class which carries rights to vote in all circumstances at general meetings of the company. 5. A person s interests and short positions in shares include those held by the following persons and trusts: SFO s316(1) his or her spouse, or any of his/hers child under 18; SFO s316(2) their respective controlled companies (with control of management or one third of the voting rights of such companies either directly or through another corporation in which they control one third of the voting rights); SFO s317 parties to any agreement to acquire shares in the relevant share capital of the company, if (i) the agreement includes provisions imposing obligations or restrictions on the use, retention or disposal of their interest; (ii) the agreement provides for the making of a loan or the providing of security for a loan, by a controlling person or a director of the company to any person on the understanding or with the knowledge that such loan would be used for the acquisition of the interests; and (iii) any interest in the company s shares is in fact acquired by any of the parties pursuant to an agreement; SFO s323 a trust, if he or she is a trustee of the trust, other than a trust where he or she is a bare trustee; SFO s322(4) a discretionary trust, where he or she is the founder of the trust; or SFO s322(4) a trust, where he or she is a beneficiary, other than a discretionary trust. Interests and short positions held by controlled companies on behalf of their customers in the ordinary course of their businesses as an investment manager, custodian or trustee are excluded, provided that specific conditions under section 316(5) of the SFO are met. PN 5(3.4)(1) Note 3 GR 18.17B(1) Note 2 PN 5(3.4)(2) Note 2 GR 18.17B(2) Note 2 6. The circumstances in which a long position arises under an equity derivative are set out in Note 5 to the previous section Directors and Chief Executives Interests or Short Positions in Shares. 7. The circumstances in which a short position arises under a securities borrowing agreement or an equity derivative are set out in Note 6 to the previous section Directors and Chief Executives Interests or Short Positions in Shares. 285

300 Presentation/Disclosure Requirement Other notifiable interests App 16.13(3) PN 5(3.5) GR GR 18.17C A statement is required of other interests recorded in the register kept by the company under section 336 of the SFO. Note: Under the SFO, certain persons other than directors and chief executives, and substantial shareholders, are required to make notification of interests and short positions in shares and underlying shares of the company to the company and to the SEHK. To the extent that such interests and short positions are recorded in the company s register (kept under section 336 of the SFO), disclosures in the annual report are required. The disclosure requirements are the same as those set out in the previous section in relation to substantial shareholders. Share option schemes Notes: LR GR LR GR The information listed below is required to be disclosed in respect of each share option scheme of the company and any of its subsidiaries. 2. The information should be provided separately for (i) each of the directors, chief executives, substantial shareholders and, for GEM listed entities, management shareholders, and their respective associates; (ii) each participant with options granted in excess of the individual limit; (iii) aggregate figures for employees; (iv) aggregate figures for suppliers of goods or services; and (v) all other participants as an aggregate whole. Summary of scheme(s) LR GR The entity is required to include in its annual report a summary of each share option scheme approved by its shareholders, setting out: (c) (d) (e) (f) (g) (h) (i) the purpose of the scheme; the participants of the scheme; the total number of securities available for issue under the scheme, together with the percentage of the issued share capital that it represents as at the date of the annual report; the maximum entitlement of each participant under the scheme; the period within which the securities must be taken up under an option; the minimum period, if any, for which an option must be held before it can be exercised; the amount, if any, payable on application or acceptance of the option, and the period within which payments or calls must or may be made or loans for such purposes must be repaid; the basis of determining the exercise price; and the remaining life of the scheme. 286

301 Presentation/Disclosure Requirement Details of options outstanding and movements in the period LR GR The annual report should disclose the following information: particulars of outstanding options at the beginning and at the end of the period, including the number of options, date of grant, vesting period, exercise period and exercise price; (c) (d) (e) particulars of options granted during the period, including the number of options, date of grant, vesting period, exercise period, exercise price and the closing price of the shares immediately before the date on which the options were granted; the number of options exercised during the period, with the exercise price and the weighted average closing price of the securities immediately before the dates on which the options were exercised; the number of options cancelled during the period, together with the exercise price of the cancelled options; and the number of options which lapsed in accordance with the terms of the scheme during the period. Fair value of options granted in the period LR GR LR Note 1 GR Note 1 The entity is encouraged to disclose in its annual report the value of options granted to participants during the period. The entity should disclose a description of the model and significant assumptions used to estimate the value of the options, taking into account factors such as risk-free interest rate, expected life, expected volatility and expected dividend, if applicable. Notes: LR Note GR Note LR Note 1(i) GR Note 1(i) LR Note 2 GR Note 2 LR Note 3 GR Note 3 LR Note 4 GR Note 4 LR Note 1(ii) GR Note 1(ii) 1. In respect of the disclosure of the value of options in the annual report, the entity should use the Black-Scholes option pricing model, the binomial model or a comparable generally accepted methodology to calculate the value of options. 2. Where the calculation of the value is referable to a risk-free interest rate, such rate should be the rate prevailing on debt securities issued by the state, such as the Exchange Fund Notes in the case of Hong Kong based entities. The entity should disclose the measurement date, which should be the date on which the options were granted. The entity should disclose the treatment of forfeiture prior to the expiry date. The entity should disclose a warning statement with regard to the subjectivity and uncertainty of the values of options to the effect that such values are subject to a number of assumptions and with regard to the limitations of the model. The listed entity should set out the expected volatility used in calculating the value, with an explanation of any deviations from the historical volatility of the securities. Note: The listed entity may choose the period of time that it considers appropriate for calculating such historical volatility. However, such period may not be less than one year or, where securities have been listed for less than one year from the date of commencement of dealings in such securities, such period is to be from the date of commencement of such dealings to the date of the calculation. LR Note 1(iii) GR Note 1(iii) An explanation should be provided of any adjustments made to dividend estimates for publiclyavailable information indicating that future performance is reasonably expected to differ from past performance. 287

302 Presentation/Disclosure Requirement Note: Expected dividends should generally be based on historical dividends. LR GR LR GR App GR Where the entity considers that disclosure of the value of options granted during the period as encouraged by LR 17.08/GR (see above) is not appropriate, it should state the reason for such non-disclosure in its annual report. The entity should disclose the accounting policy adopted for share options granted in the period. Equity issues under general mandate In the case of any issue of equity securities for cash made otherwise than to the company s shareholders in proportion to their shareholdings, and which has not been specifically authorised by the company s shareholders, the entity should disclose: (c) (d) (e) (f) (g) (h) the reasons for making the issue; the classes of equity securities issued; in respect of each class of equity securities, the number being issued, and their aggregate nominal value; the issue price of each security; the net price to the company of each security; the names of the allottees, if less than six in number, and, in cases of six or more allottees, a brief generic description of them; the market price of the securities concerned on a named date, being the date on which the terms of the issue were fixed; and the use of the proceeds. Directors biographical details App GR Brief biographical details should be provided in respect of the directors and senior managers of the entity. Such details will include name, age, positions held with the entity and other members of the Group, length of service with the entity and the Group and such other information (which may include business experience) of which shareholders should be aware, pertaining to the ability or integrity of such persons. Notes: App GR App GR App 16 Note 12.1 GR Where any of the directors or senior managers are related, by having any one of the relationships with other director or senior manager set out below, that fact should be stated. The relationships are spouse; any person cohabiting with the director or senior manager as a spouse; and any relative, meaning a child or step-child regardless of age, a parent or stepparent, a brother, sister, step-brother or step-sister, a mother in-law, a father-in law, son-inlaw, daughter-in-law, brother-in-law or sister-in-law. 2. Where any director of the company is a director or employee of a company which has an interest in the shares or underlying shares of the company which would fall to be disclosed to the company under Part XV of the Securities and Futures Ordinance, that fact should be stated. 3. It is the responsibility of the directors of the company to determine which individual or individuals constitute senior management. Senior management may include directors of subsidiaries, heads of divisions, departments or other operating units within the group, in the opinion of the company s directors, as appropriate. App 16 Note If the company is incorporated or otherwise established in the PRC, references to directors and senior managers should also mean and include supervisors. 288

303 Presentation/Disclosure Requirement Directors service contracts App GR 18.24(1) App 16.14A LR GR 18.24A GR App 23.2(e) GR App 16.2(e) A statement is required as to the unexpired period of any service contract of any director, which is not determinable by the employer within one year without payment of compensation (other than statutory compensation), who proposed for re-election at the forthcoming annual general meeting or, if there are no such service contracts, a statement to that fact. For any service contracts that are exempt from the shareholders approval requirement under LR 13.69/GR17.91, the entity must include particulars of such service contracts in its annual report during the term of any such service contracts. The term of appointment of non-executive directors should be disclosed in the Corporate Governance Report (see below). Directors interests in contracts App GR Particulars are required of any contract of significance subsisting during or at the end of the financial year in which a director of the company is or was materially interested, either directly or indirectly, or, if there has been no such contract, a statement of that fact. Notes: App 16 Note 15.2 GR Note 1 1. A contract of significance is one where any of the percentage ratios of the transaction is 1% or more. 2. The expression percentage ratios refers to the percentages resulting from each of the calculations of assets ratio, profits ratio, revenue ratio, consideration ratio and equity capital ratio set out in LR 14.04(9) and LR 14.07/GR 19.04(9) and GR App 16 Note 15.3 GR Note 2 3. Notwithstanding the percentage specified in Note 1 above, a contract is regarded as a contract of significance to the entity if the omission of information relating to that contract could have changed or influenced the judgement or decision of a person relying on the relevant information. Controlling shareholders interests in contracts The entity should disclose: App 16.16(1) GR App 16.16(2) GR particulars of any contract of significance between the reporting entity (or one of its subsidiaries) and a controlling shareholder (or any of its subsidiaries); and particulars of any contract of significance for the provision of services to the entity (or any of its subsidiaries) by a controlling shareholder (or any of its subsidiaries). Notes: App 16 Note 16.1 GR Note 1. Controlling shareholder means any shareholder entitled to exercise, or to control the exercise of, 30% (or such other amounts as are specified in the Takeovers Code as being the level for triggering a mandatory general offer) or more of the voting power at general meetings of the company, or one which is in a position to control the composition of a majority of the board of directors. 2. For this purpose, a contract of significance has the meaning set out in Note 1 to the previous section Directors interests in contracts (see above). 289

304 Presentation/Disclosure Requirement Waiver of dividend App GR The entity should disclose particulars of any arrangement under which a shareholder has waived or agreed to waive any dividends. App 16 Note 17.1 GR Note Note: Where a shareholder has agreed to waive future dividends, particulars of such waiver should be given together with those relating to dividends which were payable during the past financial year. Waivers of dividends of a minor amount may be disregarded provided that some payment has been made on each share during the relevant calendar year. Divergence from published forecasts App GR The annual report should contain an explanation for the difference if net income shown in the financial statements differs materially from any profit forecast published by the entity. Five year summary App GR A summary should accompany the financial statements, in the form of a comparative table, of the published results and of the assets and liabilities of the entity, for the previous five financial years. Where they have not been prepared on a consistent basis, that fact should be explained. Note: In consolidated financial statements, the information required need only be presented in relation to the group. Separate parent company details are not required. Pre-emptive rights App A statement is required, where applicable, that no pre-emptive rights exist in the jurisdiction in which the company is incorporated or otherwise established (overseas and PRC companies only). GR GR 17.27(2) Note: Subject to specified exemptions, all GEM listed entities are required to give their shareholders pre-emptive rights to protect their proportion of the total equity by having the opportunity to subscribe for any new issue of equity. The restrictions also apply to new issues of equity by a major subsidiary (a subsidiary where the value of its total assets, profits or revenue represents 5% or more under any of the percentage ratios as set out in Note 2 to the previous section Directors interests in contracts. Tax relief for shareholders App GR GR The entity is required to disclose the information necessary to enable holders of listed securities to obtain any relief from taxation to which they are entitled by reason of their holding of such securities (overseas and PRC companies only). Details of properties App GR Where any of the percentage ratios (as set out in Note 2 to the previous section Directors interests in contracts ) of the entity s properties held for development and/or sale or for investment purposes exceeds 5%, the following information should be shown: App 16.23(1) GR 18.23(1) 290 (i) in the case of property held for development and/or sale: an address sufficient to identify the property, which generally must include the postal address, lot number and such further designation as is registered with the appropriate government authorities in the jurisdiction in which the property is located; if in the course of construction, the stage of completion and the expected completion date; the existing use (e.g. shops, offices, factories, residential etc.); the site and gross floor area of the property; and the percentage interest in the property.

305 Presentation/Disclosure Requirement App 16.23(2) GR 18.23(2) (ii) in the case of property held for investment: an address sufficient to identify the property, which generally must include the postal address, lot number and such further designation as is registered with the appropriate government authorities in the jurisdiction in which the property is located; the existing use (e.g. shops, offices, factories, residential etc.); and whether the property is held on short lease, medium term lease or long lease or, if situated outside Hong Kong, is freehold. App 16.23(2) GR 18.23(3) Note: Where compliance with these disclosure requirements would result in particulars of excessive length being provided, disclosure is not required except in the case of properties which, in the opinion of the directors, are material. Emolument policy App 16.24B GR 18.29A The entity should include the following details of its emolument policy: a general description of the emolument policy and any long-term incentive schemes; and the basis of determining the emolument payable to its directors. Pension schemes Note: The following disclosures may be combined with the disclosures mandated by HKAS 19 Employee Benefits, within the body of the financial statements. App GR The following disclosures are required in respect of pension schemes: the nature of the principal scheme or schemes operated by the entity (i.e. whether they are defined benefit plans or defined contribution plans); (c) (d) (e) a brief outline of how contributions are calculated or benefits are funded; the employer s pension cost charged to the income statement for the financial year; in the case of defined contribution schemes, details of whether forfeited contributions (by employers on behalf of employees who leave the scheme prior to vesting fully in such contributions) may be used by the employer to reduce the existing level of contributions and, if so, the amounts so utilised in the course of the year and available at the balance sheet date for such use; and in the case of defined benefit plans, an outline of the results of the most recent formal independent actuarial valuation (which should be as at a date not earlier than 3 years prior to the date to which the entity s financial statements are drawn up) or later formal independent review of the scheme on an ongoing basis. This should include disclosure of: (i) (ii) (iii) the name and qualifications of the actuary, the actuarial method used and a brief description of the main actuarial assumptions; the market value of the scheme assets at the date of their valuation or review (unless the assets are administered by an independent trustee, in which case this information may be omitted); the level of funding expressed in percentage terms; and (iv) comments on any material surplus or deficiency (including quantification of the deficiency) indicated by (iii) above. 291

306 Presentation/Disclosure Requirement Valuation of properties App GR If the entity has caused any property assets to be valued (in accordance with LR 5.01/GR 8.01) or has caused any valuation to be made of any other tangible assets and has included such a valuation in the prospectus relating to its initial public offering and those assets are not stated at such valuation (or at subsequent valuation) in its first annual financial statements published after listing, then the entity is required to disclose the following additional information in its first annual report published after listing: the amount of such valuation of those properties or other tangible assets as included in the prospectus; and the additional depreciation (if any) that would be charged against the income statement had those assets been stated at such valuation (or subsequent valuation). Application of Hong Kong companies ordinance disclosure requirements to overseas and PRC companies App GR GR The Listing Rules and the GEM Rules require that overseas and PRC incorporated companies should provide the additional disclosures required under the following provisions of the Companies Ordinance: (c) (d) (e) (f) (g) (h) (i) (j) the Tenth Schedule; s128 (details of subsidiaries); s129 (details of investments); s129a (details of ultimate holding company); s129d (contents of the directors report); s161 (directors remuneration); s161a (corresponding figures); s161b (loans to company officers); s162 (directors interests in contracts); and s162a (management contracts). App GR GR Statement of distributable reserves The entity should include a statement of the reserves available for distribution to shareholders by the listed entity as at the balance sheet date: GR in the case of a Hong Kong entity, as calculated in accordance with section 79B of the Companies Ordinance; and in other cases, as calculated in accordance with any statutory provisions applicable in the entity s place of incorporation or, in the absence of such provisions, with generally accepted accounting principles. Changes of auditor App GR A statement is required of any change in auditor of the entity in any of the preceding three years. 292

307 Presentation/Disclosure Requirement Major customers and suppliers App GR The following information is required to be disclosed in respect of major customers and suppliers: the percentage of purchases attributable to the entity s largest supplier; (c) (d) (e) (f) (g) the percentage of purchases attributable to the entity s five largest suppliers combined; the percentage of turnover or sales attributable to the entity s largest customer; the percentage of turnover or sales attributable to the entity s five largest customers combined; the interests of any of the directors, their associates, or any shareholder (which to the knowledge of the directors owns more than 5% of the company s share capital) in the suppliers or customers disclosed under to (d) above or, if there are no such interests, a statement to that effect; in the event that the percentage which would fall to be disclosed under above is less than 30%, a statement of that fact should be given and the information required by, and (e) (in respect of suppliers) may be omitted; and in the event that the percentage which would fall to be disclosed under (d) above is less than 30%, a statement of that fact should be given and the information required by (c), (d) and (e) (in respect of customers) may be omitted. Notes: App 16 Note 31.2 GR Note 2 App 16 Note 31.3 GR Note 3 1. Customer for the purpose of this disclosure means, other than in relation to consumer goods or services, the ultimate customer and, in relation to consumer goods or services, the ultimate wholesaler or retailer. (If the entity s business incorporates the wholesaling or retailing operation, then customer refers to the ultimate customer). 2. Supplier for the purpose of this disclosure means the ultimate supplier of items which are not of a capital nature. References to supplier are primarily to those who provide goods or services which are specific to the entity s business and which are required on a regular basis to enable the entity to continue to supply or service its customers. Suppliers of goods or services which are freely available from a range of suppliers at similar prices, or which are otherwise freely available (e.g. utilities), are excluded. 3. Disclosures under (e) above should specify if the interest disclosed is in the entity s single largest customer or supplier. Disclosure is required of the name of the interested director/associate/shareholder (which to the knowledge of the directors own more than 5% of the company s share capital), but not of the identity of the supplier or customer nor the percentage shareholding held. 293

308 Presentation/Disclosure Requirement Corporate governance Note: The HKICPA has published its guideline on internal control entitled Internal Control and Risk Management - A Basic Framework (the Guide ) in order to provide guidance to entities on how to perform the review in relation to internal control. The Guide can be downloaded from the HKICPA s website at App GR 18.44(2) App 23.1 GR App 16.1 App GR 18.44(2) App 23.2 GR App 16.2 The entity should include a report on corporate governance practices (the Corporate Governance Report ) in respect of the Group prepared by the board of directors in its annual report. As a minimum, the Corporate Governance Report should contain the information required under Appendix 23 (GR Appendix 16) regarding the accounting period covered by the annual report, as follows: Corporate governance practices a narrative statement of how the entity has applied the principles in the Code, providing explanations which enables its shareholders to evaluate how the principles have been applied; (c) a statement as to whether the entity meets the code provisions in the Code. If the entity has adopted its own code that exceeds the code provisions set out in the Code, such entity may draw attention to such fact in its annual report; and in the event of any deviation from the code provisions set out in the Code, details of such deviation during the financial year (including considered reasons for such deviations). App 23.2 GR App 16.2 Directors securities transactions whether the entity has adopted a code of conduct regarding directors securities transactions on terms no less exacting than the required standard set out in the Model Code (GR 5.48 to 5.67); (c) having made specific enquiry of all directors, whether the directors of the entity have complied with, or whether there has been any non-compliance with, the required standard set out in the Mode Code (GR 5.48 to 5.67) and its code of conduct regarding directors securities transactions; and in the event of any non-compliance with the required standard set out in the Mode Code (GR 5.48 to 5.67), details of such non-compliance and an explanation of the remedial steps taken by the listed entity to address such non-compliance. App 23.2(c) GR App 16.2(c) Board of directors composition of the board, by category of directors, of the entity, including name of chairman, executive directors, non-executive directors and independent non-executive directors; (c) (d) (e) number of board meetings held during the financial year; individual attendance of each director, on a named basis, at the board meetings; a statement of how the board operates, including a high level statement of which types of decisions are to be taken by the board and which are to be delegated to management; details of non-compliance (if any) with LR 3.10 (1) and (2) (GR 5.05(1) and (2)) and an explanation of the remedial steps taken by the entity to address such non-compliance relating to appointment of a sufficient number of independent non-executive directors and an independent non-executive director with appropriate professional qualifications, or accounting or related financial management expertise, respectively; 294

309 Presentation/Disclosure Requirement Note: (f) (g) Entities are reminded of their obligation to comply with LR 3.10(1) and (2) (GR 5.05(1) and (2)). Failure to comply with such requirements constitutes a breach of the Listing Rules/GEM Rules reasons why the entity considers an independent non-executive director to be independent where he/she fails to meet one or more of the guidelines for assessing independence set out in LR 3.13 (GR 5.09); and relationship (including financial, business, family or other material/relevant relationship(s)), if any, among members of the board and in particular, between the chairman and the chief executive officer. App 23.2(d) GR App 16.2(d) Chairman and chief executive officer identity of the chairman and chief executive officer; and whether the roles of the chairman and chief executive officer are segregated and are not exercised by the same individual. App 23.2(e) GR App 16.2(e) App 23.2(f) GR App 16.2(f) Non-executive directors the term of appointment of non-executive directors. Remuneration of directors the role and function of the remuneration committee (if any) or the reason(s) for not having a remuneration committee; (c) (d) Note: the composition of the remuneration committee (if any) (including names and identifying in particular the chairman of the remuneration committee); the number of meetings held by the remuneration committee or the board of directors (if there is no remuneration committee) during the year to discuss remuneration related matters and the record of individual attendance of members, on a named basis, at meetings held during the year; and a summary of the work, including determining the policy for the remuneration of executive directors, assessing performance of executive directors and approving the terms of executive directors service contracts, performed by the remuneration committee or board of directors (if there is no remuneration committee) during the year. Under Appendix 16 (GR Chapter 18), listed entities are required to give a general description of the emolument policy and long-term incentive schemes as well as the basis of determining the emolument payable to their directors. App 23.2(g) GR App 16.2(g) Nomination of directors In relation to the appointment and removal of directors: (c) (d) (e) the role and function of the nomination committee (if any); the composition of the nomination committee (if any) (including names and identifying in particular the chairman of the nomination committee); the nomination procedures and the process and criteria adopted by the nomination committee or the board of directors (if there is no nomination committee) to select and recommend candidates for directorship during the year; a summary of the work, including determining the policy for the nomination of directors, performed by the nomination committee or the board of directors (if there is no nomination committee) during the year; and the number of meetings held by the nomination committee or the board of directors (if there is no nomination committee) during the year and the record of individual attendance of members, on a named basis, at meetings held during the year. 295

310 App 23.2(h) GR App 16.2(h) App 23.2(i) GR App 16.2(i) Auditor s remuneration Presentation/Disclosure Requirement an analysis of remuneration in respect of audit and non-audit services provided by the auditor (including any entity that is under common control, ownership or management with the audit firm or any entity that a reasonable and informed third party having knowledge of all relevant information would reasonably conclude as part of the audit firm nationally or internationally) to the listed entity. Such analysis must include, in respect of each significant non-audit service assignment, details of the nature of the services and the fees paid. Audit committee its role, function and composition of the committee members (including names and identifying in particular the chairman of the audit committee); (c) (d) Note: the number of audit committee meetings held during the year and record of individual attendance of members, on a named basis, at meetings held during the year; a report on the work performed by the audit committee during the year in discharging its responsibilities in its review of the quarterly (if relevant), half-yearly and annual results and system of internal control, and its other duties set out in the Code; and details of non-compliance with LR 3.21 (GR 5.28) (if any) and an explanation of the remedial steps taken by the listed entity to address such non-compliance relating to establishment of an audit committee. Entities are reminded of their obligation to comply with LR 3.21 (GR 5.28). Failure to comply with such requirements constitutes a breach of the Listing Rule /GEM Rules. App 23.2 Note GR App 16.2 Note In addition to the disclosure obligations described above, the code provisions in Appendix 14 (GR Appendix 15) expect listed entities to make certain specified disclosures in the Corporate Governance Report. Where listed entities choose not to make the expected disclosures, they must give considered reasons for the deviation in accordance with paragraph 2(iii) of Appendix 23 (GR Appendix 16). The specific disclosure expectations of the code provisions are set out below: (c) (d) an acknowledgement from the directors of their responsibility for preparing the accounts and a statement by the auditor about its reporting responsibilities (C.1.2 of Appendix 14 (GR Appendix 15)); report on material uncertainties, if any, relating to events or conditions that may cast significant doubt upon the listed entity s ability to continue as a going concern (C.1.2 of Appendix 14 (GR Appendix 15)); a statement that the board has conducted a review of the effectiveness of the system of internal control of the entity and its subsidiaries (C.2.1 of Appendix 14 (GR Appendix 15)); and a statement from the audit committee explaining its recommendations and the reason(s) why the board has taken a different view from that of the audit committee regarding the selection, appointment, resignation or dismissal of the external auditor (C.3.5 of Appendix 14 (GR Appendix 15)). 296

311 App 23.1 App 23.3 GR App 16.1 GR App 16.3 Presentation/Disclosure Requirement Entities are also encouraged to disclose the following information in their Corporate Governance Report: Notes: 1. The following disclosures are provided for entities reference. They are not intended to be exhaustive or mandatory. They are rather intended to set out the areas which entities may comment on in their Corporate Governance Report. The level of details needed varies with the nature and complexity of listed entities business activities. 2. Entities may consider some of the following information is too lengthy and detailed to be included in the Corporate Governance Report. As an alterative to full disclosure in the Corporate Governance Report, entities may choose to include some or all of this information: on its website and highlight to investors where they can: (i) (ii) access the soft copy of this information on its website by giving a hyperlink directly to the relevant webpage; and/or collect a hard copy of the relevant information free of charge; or where the information is publicly available, by stating where the information can be found. Any hyperlink should be directly to the relevant webpage. App 23.3 GR App 16.3 App 23.3 GR App 16.3 Share interests of senior management the number of shares held by senior management (i.e. those individuals whose biological details are disclosed in the annual report). Shareholders rights the way in which shareholders can convene an extraordinary general meeting; (c) the procedures by which enquires may be put to the board together with sufficient contact details to enable such enquires to be properly directed; and the procedures for putting forward proposals at shareholders meetings with sufficient contact details. App 23.3(c) GR App 16.3(c) Investor relations any significant changes in the entity s articles of association during the year; Note: (c) (d) (e) details of shareholders by type and aggregate shareholding; Entities are reminded of their obligation to comply with the requirements in Appendix 16 and PN 5 (GR Chapter 18) relating to the disclosure of interests in the entity. They may wish to mention such information in this section of the Corporate Governance Report. details of the last shareholders meeting, including the time and venue, major items discussed and particulars as to voting; indication of important shareholders dates in the coming financial year; public float capitalisation as at the end of the year. 297

312 App 23.3(d) GR App 16.3(d) Internal controls Presentation/Disclosure Requirement where the entity includes a statement by the directors that they have conducted a review of its system of internal control in the annual report pursuant to paragraph C.2.1 of Appendix 14 (GR Appendix 15), the entity is encouraged to disclose the following details in such report: (i) (ii) (iii) (iv) (v) (vi) (vii) an explanation of how the system of internal control has been defined for the entity; procedures and internal controls for the handling and dissemination of price sensitive information; whether the entity has an internal audit function or the outcome of the review of the need for an internal audit function where the entity has no such function; how often internal controls are reviewed; a statement that the directors have reviewed the effectiveness of the system of internal control and whether they consider the internal control systems effective and adequate; criteria for the directors to assess the effectiveness of the system of internal control; the period which the review covers; (viii) details of any significant areas of concern which may affect shareholders; (ix) (x) significant views or proposals put forward by the audit committee; and where the entity has not conducted a review of its internal control during the year, an explanation of why it has not done so; (c) a narrative statement (including the terms under C.2.3 of App 14 (GR Appendix 15)) of how the entity has complied with the code provisions on internal control during the reporting period (C.2.3 of Appendix 14 (GR Appendix 15)); and the outcome of the review conducted on an annual basis by the entity without an internal audit function of the need for one (C.2.5 of Appendix 14 (GR Appendix 15)). App 23.3(e) GR App 16.3(e) Management functions the division of responsibility between the board and management. Appointment of independent non-executive directors App 16.12A GR 18.39A App 16.12B GR 18.39B In relation to an independent non-executive director appointed by the entity during the financial year, if he has failed to meet any of the independence guidelines set out in LR 3.13/GR 5.09, the entity should disclose the reasons why such an independent non-executive director was and is considered to be independent. For each of the independent non-executive director, the entity should include in the annual report, the following information to confirm: whether it has received from each of its independent non-executive directors an annual confirmation of his independence pursuant to LR 3.13/GR 5.09; and whether it still considers the independent non-executive directors to be independent. Sufficiency of public float App 16.34A LR Main Board listed entities should include a statement of sufficiency of public float. Note: The statement should be based on information that is publicly available to the entity and within the knowledge of the directors as at the latest practicable date prior to the issue of the annual report. 298

313 Presentation/Disclosure Requirement Interests in competitors Main board listed entities LR 8.10(2)&(c) Where any of the directors (other than the independent non-executive directors) is interested in any business which competes or is likely to compete, either directly or indirectly, with the business of the group, details of such interests as required by LR 8.10(1)(ii) and (iii) and any changes therein should be prominently disclosed in the annual report. GEM listed entities GR GR GR Note 3 Disclosure is required of any directorship or ownership of an entity by any director, management shareholder or their respective associates of the entity, where that entity competes or may compete with the business of the entity and any other conflicts of interest which any such person has or may have with the entity. The disclosures made should include: (c) the name of each entity; the nature of its business; and details of the directorship and/or ownership of the entity s directors or management shareholders and substantial shareholders and their respective associates in such entity. GR Note 1 Note: For this purpose, a controlling shareholder is deemed to be a management shareholder. Connected transactions App 16.8(1) LR 14A.45 GR 18.09(1) GR In relation to connected transactions that are not exempt under LR 14A.31/GR 20.31, the following details of the transaction should be disclosed in the next annual report pursuant to LR 14A.45/GR 20.45: the date of the transaction; (c) (d) (e) the parties thereto and a description of their connected relationship; a brief description of the transaction and the purpose of the transaction; the total consideration and the terms (including, where relevant, interest rates, length of repayment period and security, if any); and the nature and extent of the interest of the connected person in the transaction. App 16.8(2) LR 14A.46 GR 18.09(2) GR LR 14A.37 GR In relation to continuing connected transactions that are not exempt under LR 14A.33/GR 20.33, information as set out in the previous paragraph (see above) should be disclosed in the subsequent annual report for the financial years during which the entity undertakes the transaction under the written agreement entered into pursuant to LR 14A.35(1)/GR 20.35(1). The independent non-executive directors of the entity should include a statement in the annual report to confirm that the continuing connected transactions have been entered into: (c) in the ordinary and usual course of business of the entity; either on normal commercial terms or, if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the entity than terms available to or from (as appropriate) independent third parties; and in accordance with the relevant agreement governing them on terms that are fair and reasonable and in the interests of the shareholders of the entity as a whole. 299

314 Presentation/Disclosure Requirement LR 14A.39 LR 14A.38 GR The entity s board of directors should include in the annual report whether the auditor has confirmed that the continuing connected transactions: GR have received the approval of the entity s board of directors; (c) (d) Note: are in accordance with the pricing policies of the entity if the transactions involve provision of goods or services by the entity; have been entered into in accordance with the relevant agreement governing the transactions; and have not exceeded the cap disclosed in previous announcement(s). Each year, the entity s auditor should provide a letter to the entity s board of directors (with a copy provided to the SEHK at least 10 business days prior to the bulk printing of the annual report), confirming the matters mentioned above. App 16.8(3) GR 18.09(3) Where the entity includes in its annual report particulars of a connected transaction or continuing connected transaction (as the case may be) in accordance with HKAS 24 Related Party Disclosures, or applicable IFRS, it should: specify whether or not the transaction falls under the definition of connected transaction or continuing connected transaction in Chapter 14A of the Listing Rules/Chapter 20 of the GEM Rules; and confirm whether or not it has complied with the disclosure requirements in accordance with Chapter 14A of the Listing Rules/Chapter 20 of the GEM Rules. 300

315 Presentation/Disclosure Requirement Exposure to borrowers and other specific circumstances that may require disclosure Notes: 1. LR to LR 13.22/GR to GR give guidance on specific circumstances (see below) that may require timely public disclosure under the general disclosure obligation placed on the entity under LR 13.09/GR If any of the specified circumstances occurs, the entity is required to make a public announcement immediately. In addition, if the circumstances specified in LR to LR 13.19/GR to GR continue to exist at the entity s financial year end, specific disclosures are required. 2. On 14 February 2006, the SEHK announced amendments to the Listing Rule/GEM Rules relating to the disclosure of advances to entities. For the purpose of LR to LR 13.16/GR to GR the applicable test has been amended to only the assets ratio. The rule amendments also introduce a new rule LR 13.15A/GR 17.17A that excludes a trade receivable from advances to entities for the purpose of LR and LR 13.14/GR and GR in the calculation of the assets ratio where the trade receivable (other than as a result of the provision of financial assistance) arose in the ordinary and usual course of business of the issuer and the transaction from which the trade receivable arose was on normal commercial terms. The specific circumstances addressed by LR to LR 13.19/GR to GR LR 13.13, LR GR 17.15, GR LR GR LR GR LR GR LR GR advances to an entity amounting to more than 8% under the assets ratio as defined under LR 14.07(1)/GR 19.07(1) and any subsequent increase of such amount accounting for 3% or more under the assets ratio as defined under rule LR 14.07(1)/GR 19.07(1); financial assistance and guarantees to affiliated companies together in aggregate amounting to more than 8% of assets ratio as defined under LR 14.07(1)/GR 19.07(1); pledging of shares by the controlling shareholder to secure debts of the entity or to secure guarantees or support other obligations of the entity; loan agreements which include conditions imposing specific performance obligations on a controlling shareholder where breaches of such obligations will cause a default in respect of loans that are significant to the operations of the entity; and breaches of the terms of a loan agreement by the entity such that the lender may demand immediate repayment of a significant loan. GR In addition, GR imposes disclosure obligations on GEM listed entities in respect of the pledging or charging of any interests in securities of the entity by any initial management shareholder or significant shareholder. If the circumstances continue to exist, disclosure is required in subsequent annual reports. LR 13.11(2) GR The expression affiliated company refers to a company which, in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants, is recorded using the equity method of accounting in the entity s financial statements. This includes associates and jointly controlled entities as defined in those Standards. 301

316 Presentation/Disclosure Requirement LR LR GR GR Advances to an entity Where the entity has been required to make disclosure during the period in respect of advances to an entity, and the circumstances giving rise to the disclosure continue to exist at the financial year end, the following information (as at the year end) should be included in the annual report: GR details of the balances; Note: (c) (d) For GEM listed entity, disclosure of the details of the relevant advance to an entity is required. the nature of events or transactions giving rise to the amounts; the identity of the debtor group; and interest rate, repayment terms and collateral. Notes: LR 13.15A GR 17.17A 1 For the purpose of LR 13.13/GR and LR 13.14/GR17.16, where: (1) any trade receivable (other than as a result of the provision of financial assistance) arose in the ordinary and usual course of business of the issuer; and (2) the transaction from which the trade receivable arose was on normal commercial terms, the trade receivable should not be regarded as a relevant advance to an entity. LR LR 13.11(2)(c) GR GR Note 2 2. A general disclosure obligation arises where the relevant advance to an entity exceeds 8% of the assets ratio as defined under LR 14.07(1)/GR 19.07(1). The expression relevant advance to an entity refers to the aggregate of amounts due from and all guarantees given on behalf of: (c) (d) (e) an entity; the entity s controlling shareholders; the entity s subsidiaries; the entity s affiliated companies; and for GEM listed entity only, any other entity with the same controlling shareholder as the entity in question. Financial assistance and guarantees to affiliated companies of the entity LR GR GR LR GR LR GR Where the entity has been required to make disclosure during the period in respect of financial assistance and guarantees to affiliated companies, and the circumstances giving rise to the disclosure continue to exist at the financial year end, the annual report should include a pro forma combined balance sheet of the affiliated companies as of the latest practicable date. Notes: 1. A general disclosure obligation arises where financial assistance given to affiliated companies of the entity, and guarantees given for facilities granted to affiliated companies, together in aggregate exceeds 8% of the assets ratio as defined under LR 14.07(1)/GR 19.07(1). 2. The combined balance sheet of the affiliated companies should include significant balance sheet classifications and state the attributable interest of the entity in the affiliated companies. In cases where it is not practicable to prepare the combined balance sheet of the affiliated companies, the SEHK, on application from the entity, may consider accepting, as an alternative, a statement of the indebtedness, contingent liabilities and capital commitments as at the end of the period reported on by the affiliated companies. 302

317 Presentation/Disclosure Requirement Pledging of shares by the controlling shareholder LR LR GR GR GR Where the entity has been required to make disclosure during the period because the controlling shareholder has pledged its interest in shares of the entity to secure debts of the entity, and the circumstances continue to exist at the date of the annual report, the following disclosures should be made in the annual report: the number and class of shares pledged; (c) Note: the amount of debts, guarantees or other support for which the pledge is made; and any other details that are considered necessary for an understanding of the arrangements. A general disclosure obligation arises where the controlling shareholder of the entity has pledged its interest in shares of the entity to secure debts of the entity or to secure guarantees or support other obligations of the entity. Loan agreements imposing specific performance on controlling shareholder LR LR GR GR GR Where the entity has been required to make disclosure during the period in respect of loan agreements with covenants relating to specific performance of the controlling shareholder, and breaches of such obligations will cause a default in respect of loans that are significant to the operations of the entity, and the circumstances continue to exist at the date of the annual report, the following disclosures should be made in the annual report: (c) Note: the aggregate level of the facilities that may be affected by such a breach; the life of the facility; and the specific obligation imposed on any controlling shareholder. A general disclosure obligation arises where the entity (or any of its subsidiaries) has entered into a loan agreement that includes a condition imposing specific performance obligations on any controlling shareholder (e.g. a requirement to maintain a specified minimum holding in the share capital of the entity), and breach of such obligation will cause a default in respect of loans that are significant to the operations of the entity. Breaches of loan agreements general LR LR GR GR GR If disclosure has been required during the period of a breach of terms of a loan agreement by the entity, and the circumstances continue to exist at the date of the annual report, disclosure of the circumstances is also required in the annual report. Note: A general disclosure obligation arises where there is a breach of the terms of a loan agreement by the entity for a loan that is significant to the operations of the entity, such that the lender may demand immediate repayment of the loan and where the lender has not issued a waiver in respect of the breach. 303

318 Presentation/Disclosure Requirement Pledging of securities by an initial management shareholder or significant shareholder (GEM listed entities only) GR GR Where a GEM listed entity has been required to make disclosure during the period because an initial management shareholder or a significant shareholder has pledged or charged its interest in the securities of the entity, and the circumstances continue to exist at the date of the annual report, the following disclosures should be included in the annual report: (c) (d) the number and class of securities pledged or charged; the purpose for which the pledge or charge is made; any other relevant details; and in the event that the pledgee or chargee has disposed of or intends to dispose of any securities, details of the same, including the number of securities affected or to be affected. GR Note: A general disclosure obligation arises where an initial management shareholder or a significant shareholder has availed of the exemptions available under GR 13.18(1) or GR 13.18(4) to pledge or charge its interests in the securities of the entity at any time within the specified moratorium periods. Additional disclosure requirements for GEM listed entities Statement of investment risk GR Note 2 GR 2.20 The annual report and accounts should contain, in a prominent position, and in bold type, a statement about the characteristics of GEM, as follows: Characteristics of the Growth Enterprise Market ( GEM ) of The Stock Exchange of Hong Kong Limited (the Exchange ). GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on GEM with neither a track record of profitability nor any obligations to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors. Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM. The principal means of information dissemination on GEM is publication on the internet website operated by the Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website in order to obtain up-to-date information on GEM-listed issuers. Progress of business plan GR In the case of the annual financial statements for the financial year in which the entity s securities are first admitted to listing on GEM, and the annual financial statements for the two financial years thereafter, a detailed statement by the directors is required as to the progress of the entity by comparison of actual business progress to the information provided in the statement of business objectives (as set out in its listing document) for the equivalent period, together with an explanation of any material differences (including as to its use of proceeds, as indicated in the listing document). 304

319 Presentation/Disclosure Requirement Audit committee GR The entity should disclose the full name and professional qualifications (if any) of : a) the company secretary; b) the qualified accountant responsible for the financial reporting procedures and the internal controls; and c) the compliance officer responsible for compliance with the GEM Rules and liaison with the SEHK. Sponsor s interests GR Disclosure is required of the interests (if any) of the Sponsor, and of its directors, employees and associates, as notified to the entity pursuant to GR Independent auditor s report Auditor s report for overseas companies Preface (20) Preface (21) Where the financial statements of an overseas entity are to be incorporated into Hong Kong financial statements, the audit of the overseas entity should conform to HKSAs. Where a member of the HKICPA is carrying out an audit overseas for purposes other than Hong Kong reporting, the audit should conform to appropriate standards as follows: where the local audit requirements and standards are properly codified and defined, the audit may conform to those standards; and in the absence of such local requirements and standards, the audit should conform to HKSAs or to International Standards on Auditing. LR 19.21, LR 19A.32 GR 24.14, GR LR 19.23, LR 19A.34 GR 24.16, GR LR LR 19A.36 LR 19.25, LR 19A.37 GR 24.18, GR The accounts should be audited to a standard comparable to that required by the HKICPA or by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC). The auditor s report should indicate the act, ordinance or other legislation in accordance with which the annual accounts have been drawn up and the authority or body whose auditing standards have been applied. If the entity s primary listing is or is to be on a stock exchange outside Hong Kong, an auditor s report which conforms to the requirements of the International Standards on Auditing issued by the International Auditing and Assurance Standards Board of the IFAC is acceptable. An auditor s report in a different form may be applicable in the case of banking and insurance companies. The wording of such an auditor s report should make it clear whether or not profits have been stated before transfers to or from undisclosed reserves. 305

320 Presentation/Disclosure Requirement Financial statements Accounting standards, accounting estimates, and true and fair view App 16.5 GR A statement is required indicating which body of accounting standards has been followed in the preparation of the financial statements. Notes: 1. Where the listed entity is a Hong Kong incorporated company, legal opinion has confirmed that the financial statements must comply with the requirements of Hong Kong GAAP. Therefore, the options to use IFRS or US GAAP set out in the Listing Rules/GEM Rules are not available to Hong Kong incorporated companies. App 16 Note 2.1 GR All entities with a primary listing, or in the process of obtaining a primary listing, on either the Main Board or the GEM are permitted to use either HKFRS or IFRS, provided that they applied the standards consistently. App 16 Note Overseas incorporated entities with a secondary listing, or in the process of obtaining a secondary listing, on the Main Board are permitted to use US GAAP. GR GEM registrants incorporated overseas and either already listed or being simultaneously listed on the New York Stock Exchange or the NASDAQ National Market are permitted to prepare their financial statements in accordance with US GAAP, subject to certain conditions. App 16 Note 2.1 App 16 Note 2.3 App 16 Note 2.2 GR Note 5. Entities listed on the Main Board adopting IFRS are required to disclose and explain significant differences between the financial statements presented and those that would have been presented under HKFRS. A statement of the financial effect of material differences is required. However, this requirement for a reconciliation to HKFRS does not apply to entities incorporated or otherwise established in the PRC (H-share entities), which have always been permitted to use IFRS. Where the entity changes from one basis of accounting to another, the reasons for such change should be disclosed in the financial statements. Note: The entity should not change from one basis of accounting to another unless there are reasonable grounds to justify such a change. App 16.5 GR App 16 Note 2.5 GR Note 3 App 16.3 GR The financial statements should include a statement by the directors as to the reasons for any significant departure from an applicable accounting standard. If an accounting estimate reported in a prior interim period of the current financial year is changed during a subsequent interim period of the same financial year and has a material effect in that subsequent interim period, the nature and amount of a change in an accounting estimate that has a material effect in the current financial year or which is expected to have a material effect in subsequent periods should be disclosed. If it is impracticable to quantify the amount, that fact should be disclosed. If the relevant annual financial statements do not give a true and fair view of the state of affairs, results of operations, or cash flows of the entity or the group, more detailed and/or additional information should be provided. App 16 Note 3.1 GR Note Note: If the entity is in doubt as to what more detailed and/or additional information should be provided, it should apply to the SEHK for guidance. 306

321 Presentation/Disclosure Requirement Segment information App 16.7 GR Note: The SEHK requires the disclosure of segment information to comply with HKAS 14 or applicable IFRS or US GAAP. HKAS The following disclosures should be made for each reportable segment based on an entity s primary reporting format: HKAS segment revenue, separately distinguishing segment revenue from sales to external customers and segment revenue from transactions with other segments; HKAS segment result presenting the result from continuing operations separately from the result from discontinued operations; HKAS 14.52A Note: Segment results in prior periods should be restated so that the disclosure required above relating to discontinued operations relate to all operations that had been classified as discontinued at the balance sheet date of the latest period presented. HKAS (c) the total carrying amount of segment assets; HKAS (d) the segment liabilities; HKAS (e) the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets); Note: This information should be presented on an accrual basis, not a cash basis. HKAS (f) the total amount of expense included in segment result for depreciation and amortisation of segment assets for the period; HKAS (g) the total amount of significant non-cash expenses, other than depreciation and amortisation, that are included in segment expense and, therefore, deducted in measuring segment result; HKAS (h) the aggregate of the entity s share of the net profit or loss of associates, joint ventures or other investments accounted for under the equity method, if substantially all of those operations are within that single segment; and HKAS (i) where the group s share of results of associates, joint ventures on other investments accounted for under the equity method is disclosed under (h) above, the aggregate investments in those associates and joint ventures. Notes: HKAS Entities are encouraged, but not required, to disclose the nature and amount of any items of segment revenue and segment expense that are of such size, nature or incidence that their disclosure is relevant to explain the performance of each reportable segment for the period. HKAS Entities are encouraged, but not required to make the cash flow disclosures for its reportable segments that are encouraged by HKAS 7 Cash Flow Statements; and to separately disclose significant non-cash revenues that were included in segment revenue and, therefore, added in measuring segment result. HKAS The entity that provides the segment cash flow disclosures that are encouraged by HKAS 7 need not also disclose depreciation and amortisation expenses nor non-cash expenses pursuant to (f) and (g) above. 307

322 HKAS Presentation/Disclosure Requirement The entity should disclose the following for each reportable segment based on its primary format: the amount of impairment losses recognised in the income statement and directly in equity during the period; and the amount of reversals of impairment losses recognised in the income statement and directly in equity during the period. HKAS The entity should present a reconciliation between the information disclosed for reportable segments and the aggregated information in the consolidated or entity financial statements, including: (c) (d) (e) segment revenue reconciled to entity revenue from external customers (including disclosure of the amount of entity revenue from external customers not included in any segment s revenue); segment result from continuing operations reconciled to a comparable measure of entity operating profit or loss as well as to entity profit or loss from continuing operations; segment result from discontinued operations to entity profit or loss from discontinued operations; segment assets reconciled to entity assets; and segment liabilities reconciled to entity liabilities. HKAS If an entity s primary format for reporting segment information is business segments, it should also report the following information: (c) segment revenue from external customers, by geographical area, based on the geographical location of its customers, for each geographical segment whose revenue from sales to external customers is 10% or more of total entity revenue from sales to all external customers; the total carrying amount of segment assets, by geographical location of assets, for each geographical segment whose segment assets are 10% or more of the total assets of all geographical segments; and the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets), by geographical location of assets, for each geographical segment whose segment assets are 10% or more of the total assets of all geographical segments. HKAS If an entity s primary format for reporting segment information is geographical segments (whether based on location of assets or location of customers), it should also report the following segment information for each business segment whose revenue from sales to external customers is 10% or more of total entity revenue from sales to all external customers or whose segment assets are 10% or more of the total assets of all business segments: (c) segment revenue from external customers; the total carrying amount of segment assets; and the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets). HKAS If an entity s primary format for reporting segment information is geographical segments that are based on location of assets, and if the location of its customers is different from the location of its assets, then it should also report revenue from sales to external customers for each customerbased geographical segment whose revenue from sales to external customers is 10% or more of total entity revenue from sales to all external customers. 308

323 HKAS Presentation/Disclosure Requirement If the entity s primary format for reporting segment information is geographical segments that are based on location of customers, and if the entity s assets are located in different geographical areas from its customers, then it should also report the following segment information for each assetbased geographical segment whose revenue from sales to external customers or segment assets are 10% or more of related consolidated or total entity amounts: the total carrying amount of segment assets by geographical location of the assets; and the total cost incurred during the period to acquire segment assets that are expected to be used during more than one period (property, plant, equipment, and intangible assets) by location of the assets. HKAS If a business segment or geographical segment for which information is reported to the board of directors and chief executive officer is not a reportable segment because it earns a majority of its revenue from sales to other segments, but nonetheless its revenue from sales to external customers is 10% or more of total entity revenue from sales to all external customers, the entity should disclose: (c) the fact that these circumstances exist; the amount of revenue from sales to external customers; and the amount of revenue from internal sales to other segments. HKAS HKAS The basis of pricing inter-segment transfers and any change therein should be disclosed. Where changes in accounting policies are adopted for segment reporting that have a material effect on segment information: prior period segment information presented for comparative purposes should be restated unless it is impracticable to do so; and details of the change should be disclosed, including: (i) (ii) (iii) (iv) a description of the nature of the change; the reasons for the change; the fact that comparative information has been restated or that it is impracticable to do so; and the financial effect of the change, if it is reasonably determinable. HKAS HKAS If an entity changes the identification of its segments and it does not restate prior period segment information on the new basis because it is impracticable to do so then, for the purpose of comparison, the entity should report segment data for both the old and the new bases of segmentation in the year in which it changes the identification of its segments. If not otherwise disclosed in the financial statements or elsewhere in the financial report, the entity should indicate, for both primary and secondary segments: the types of products and services included in each reported business segment; and the composition of each reported geographical segment. 309

324 Presentation/Disclosure Requirement Borrowings App 16.22(1) GR A statement is required, showing: bank loans and overdrafts; and other borrowings; analysed over the following repayment terms: (i) (ii) (iii) (iv) on demand or within a period not exceeding one year; within a period of more than one year but not exceeding two years; within a period of more than two years but not exceeding five years; and within a period of more than five years. Interest capitalized App 16.22(2) GR App GR A statement is required showing the amount of interest capitalised by the group during the year. Directors emoluments The entity should disclose the following details of directors and past directors emoluments, on a named basis: the directors fees for the financial year; the directors basic salaries, housing allowances, other allowances and benefits in kind; App 16 Note 24.2 GR Note 3 Note: (c) (d) Where a director is contractually entitled to bonus payments which are fixed in amount, such payments are more in the nature of basic salary and, accordingly, should be disclosed under this heading. the contributions to pension schemes for directors or past directors for the financial year; the bonuses paid or receivable by directors which are discretionary or are based on the entity s, the group s or any member of the group s performance for the financial year; App 16 Note 24.3 GR Note 4 Note: (e) (f) In addition to discretionary bonus payments, all bonus payments to which a director is contractually entitled and which are not fixed in amount together with the basis upon which they are determined, should be disclosed under this heading. the amounts paid during the financial year or receivable by directors as an inducement to join or upon joining the company; and the compensation paid during the financial year or receivable by directors or past directors for loss of office as a director of any member of the group or of any other office in connection with the management of the affairs of any member of the group, distinguishing between contractual and other payments. App 16 Note 24.4 GR Note 1 Note: If the entity is incorporated or otherwise established in the PRC, references to directors or past directors should also mean and include supervisors and past supervisors, as appropriate. GR 18.28(7) For GEM listed entities, information on share options held by directors as required under GR should be disclosed. 310

325 App 16.24A GR Presentation/Disclosure Requirement The entity should disclose particulars of any arrangement under which a director has waived or agreed to waive any emoluments. App 16 Note 24A.1 GR Note Note: Where a director has agreed to waive future emoluments, particulars of such waiver should be disclosed together with those relating to emoluments which accrued during the past financial year. This applies in respect to emoluments from the entity or any of its subsidiaries or other person. Emoluments of the five highest paid individuals App GR App GR The entity should disclose information in respect of the five individuals whose emoluments (excluding amounts paid or payable by way of commissions on sales generated by the individual) were the highest in the entity or the group during the year. Where all five of the five highest-paid individuals are directors of the entity and the information required to be disclosed by this paragraph has been disclosed in directors emoluments above, a statement of that fact should be made and no additional disclosure is required. Where the details of one or more of the individuals whose emoluments were the highest have not been included in directors emoluments above, the following information should be disclosed: (c) (d) (e) (f) the aggregate of basic salaries, housing allowances, other allowances and benefits in kind for the financial year; the aggregate of contributions to pension schemes for the financial year; the aggregate of bonuses paid or receivable which are discretionary or are based on the entity s, the group s or any member of the group s performance for the financial year; the aggregate of amounts paid during the financial year or receivable as an inducement to join or upon joining the entity or the group; the aggregate of compensation paid during the financial year or receivable for loss of any office in connection with the management of the affairs of any member of the group, distinguishing between contractual payments and other payments; and an analysis showing the number of individuals whose remuneration (being amounts paid under to (e) above) fell within bands from HK$nil up to HK$1,000,000 or into higher bands (where the higher limit of the band is an exact multiple of HK$500,000 and the range of the band is HK$499,999). App 16 Note 25.1 GR Note 1 Note: It is not necessary to disclose the identity of the highest paid individuals, unless any of them are directors of the entity. Earnings per share HKAS HKAS App 16.4(1)(g) GR 18.50B(1)(m) The entity should present earnings per share information (see detailed requirements below) separately for each class of ordinary shares that has a different right to share in profit for the period. The entity should present on the face of the income statement: basic and diluted earnings per share for profit or loss from continuing operations attributable to the ordinary equity holders of the parent entity; and Note: basic and diluted earnings per share for profit or loss for the period attributable to the ordinary equity holders of the parent entity. Earnings per share is presented for every period for which an income statement is presented. If diluted earnings per share are reported for at least one period, it should be reported for all periods presented, even if it equals basic earnings per share. If basic and diluted earnings per share are equal, dual presentation can be accomplished in one line on the income statement. 311

326 HKAS HKAS Presentation/Disclosure Requirement The entity that reports a discontinued operation should disclose the basic and diluted amounts per share for the discontinued operation on the face of the income statement or in the notes to the financial statements. The entity should disclose the following: (c) (d) the amounts used as the numerators in calculating basic and diluted earnings per share, and a reconciliation of those amounts to profit or loss attributable to the parent entity for the period; the weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share, and a reconciliation of those denominators to each other; instruments (including contingently issuable shares) that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per shares because they are antidilutive for the period(s) presented; and a description of ordinary share transactions or potential ordinary share transactions, other than those accounted for in accordance with paragraph 64 of HKAS 33, that occur after the balance sheet date and that would have changed is significantly that number of ordinary shares or potential ordinary shares outstanding at the end of the period if those transactions had occurred before the end of the reporting period. HKAS If the entity discloses, in addition to basic and diluted earnings per share, amounts per share using a reported component of the income statement other than one required by HKAS 33: (c) (d) (e) such amounts should be calculated using the weighted average number of ordinary shares determined in accordance with HKAS 33; basic and diluted per share amounts should be disclosed with equal prominence; the amounts should be presented in the notes to the financial statements; the entity should indicate the basis on which the numerator(s) is (are) determined, including whether amounts per share are before or after tax; and if a component of the income statement is used that is not reported as a line item in the income statement, a reconciliation should be provided between the component used and a line item that is reported in the income statement. HKAS The calculation of the basic and diluted earnings per share for all periods presented should be adjusted retrospectively for: (c) (d) any increases in the number of shares or potential ordinary shares outstanding during the period as a result of a capitalisation or bonus issue or share split; any decreases in the number of shares or potential ordinary shares outstanding during the period as a result of a reverse share split; any such increases or decreases that occur after the balance sheet date but before the issue of the financial statements; and the effects of errors and adjustments resulting from changes in accounting policies accounted for retrospectively. HKAS Where applicable, the fact that per share calculations have been adjusted retrospectively to reflect increases/decreases in the number of ordinary or potential ordinary shares outstanding arising from capitalisation issues or share splits/reverse share splits should be disclosed. 312

327 Presentation/Disclosure Requirement Subsidiaries App 16.9(1) GR 18.10(1) A statement is required showing: the name of every subsidiary; (c) (d) Note: its principal country of operation; its country of incorporation or other establishment; and in the case of a subsidiary established in the PRC, the kind of legal entity it is registered as under PRC law (e.g. contractual or cooperative joint venture). For GEM listed entities, the requirement to disclose the form of legal entity applies to all subsidiaries, not just PRC subsidiaries. App 16.9(2) GR 18.10(2) GR 18.10(3) Particulars should be disclosed of the issued share capital and debt securities of every subsidiary. For GEM listed entities, the nature of the business of every subsidiary should also be disclosed. App 16 Note 9.2 GR Note: If the entity has an excessive number of subsidiaries, the statement need only include details for subsidiaries which, in the opinion of the directors, materially contribute to the net income of the group or hold a material portion of the assets or liabilities of the group. Accounts receivable App 16.4(2)(ii) GR 18.50B(2)(ii) The financial statements should disclose the credit policy followed in respect of accounts receivable, and an aged analysis of accounts receivable. Accounts payable App 16.4(2)(c)(ii) GR 18.50B(2)(c)(ii) App GR 18.37B App 16 Note 36.1 GR 18.37B Note App GR 18.37A The financial statements should disclose an aged analysis of accounts payable. Additional disclosure requirements for financial conglomerates Notes: 1. The following disclosures relate only to financial conglomerates. A financial conglomerate is defined as an entity that: any of the percentage ratios (as defined under LR 14.04(9) and LR 14.07/GR 19.04(9) and GR 19.07) of its financial business exceeds 5%. For the avoidance of doubt, the entity must compare the total assets of its financial business to that of the group as at the end of the period for the purpose of the assets ratio under LR 14.07/GR The entity must compare the revenue and profits of its financial business during the period under review to that of the entity for the purpose of the revenue ratio and profits ratio under LR 14.07/GR 19.07; and as at the end of the period, its financial business has total assets of over HK$1 billion or has customer deposits plus financial instruments held by the public of over HK$300 million. 2. For the purpose of these disclosure requirements, financial business includes, but is not limited to, the business of securities trading; giving advice in connection with securities; commodities trading; leveraged foreign exchange trading; insurance activities; and money lending. 3. The information required by App 16.35(1)-(3)/GR 18.37A(1)-(3) (see below), to be presented either on the face of the primary statements or in the notes, is considered to be part of the financial statements and therefore, where applicable, will be subject to audit. The information required by App 16.35(4)/GR 18.37A(4) (see below) will be presented outside the financial statements, generally as part of the directors business review. 313

328 App 16.35(1) GR 18.37A(1) Presentation/Disclosure Requirement The following items should be disclosed in the income statement of a financial conglomerate: interest income; (c) (d) (e) (f) (g) (h) (i) (j) interest expense; gains less losses arising from dealing in foreign currencies; gains less losses on trading securities or other investments in securities; gains less losses from other dealing activities; gains less losses arising from derivative products; charge for bad and doubtful debts; gains less losses from disposal of investment securities or non-trading securities; provisions relating to held-to-maturity securities and investment securities, or provisions relating to held-to-maturity securities and non-trading securities; and operating profit by products and divisions. App 16.35(2) GR 18.37A(2) The following items should be disclosed in the balance sheet of a financial conglomerate: cash and short-term funds (with an analysis between cash and balances with banks and other financial institutions, money at call and short notice and treasury bills where applicable); (c) (d) (e) (f) (g) trading securities or other investments in securities (the analysis of investments in securities should distinguish between equities and debt securities and they should also be analysed between those that are listed and those that are unlisted. The analysis should be provided separately for held-to-maturity securities, investment securities, other investments in securities, trading securities and non-trading securities where applicable. The market value for the listed securities as at the balance sheet date should also be disclosed); advances and other accounts (with an analysis between advances to customers, advances to banks and other financial institutions, accrued interest and other accounts, provisions for bad and doubtful debts and the related collateral security); held-to-maturity securities and investment securities or held-to-maturity securities and nontrading securities (with an analysis of held-to-maturity securities, investment securities, other investments in securities, trading securities and non-trading securities separately into those issued by central governments and central banks, public sector entities, banks and other financial institutions; corporate entities; and others. The market value of listed securities as at the balance sheet date should also be disclosed); issued debt securities; other accounts and provisions such as obligations under leases, sale and repurchase agreements, and forward contracts (with an analysis where material); and a maturity profile of the following assets and liabilities unless immaterial: 314

329 Presentation/Disclosure Requirement Assets advances to customers placements with banks and other financial institutions certificates of deposit held debt securities (with an analysis into those included in held-to-maturity securities, trading securities or other investments in securities and investment securities or nontrading securities) Liabilities deposits and balances of banks and other financial institutions current, fixed savings and other deposits of customer certificates of deposit issued issued debt securities App 16.35(3) GR 18.37A(3) The following should be disclosed in respect of the off-balance sheet exposures of a financial conglomerate: (c) (d) contingent liabilities and commitments; derivatives (with an analysis into those related to exchange rate contracts and interest rate contracts. The aggregate notional amounts of each significant class of derivative instruments should also be analysed into those entered into for trading or hedging purposes); where applicable, the aggregate credit risk weighted amounts of its contingent liabilities and commitments, exchange rate contracts, interest rate contracts and other derivatives, if any; and the aggregate replacement costs of its exchange rate contracts, interest rate contracts and other derivative contracts, if any. App 16.35(4) GR 18.37A(4) The following supplementary information is required in respect of financial conglomerates: Management of risks A description of the main types of risk arising out of its business, including, where appropriate, credit, interest rate, foreign exchange and market risks arising out of its trading book. It should also include a description of the policies, procedures (including hedging policies) and controls used for measuring, monitoring and controlling those risks and managing the capital required to support them. Segmental information Where a geographical segment of the financial business represents 10% or more of the entity s whole business, then that segment should be further analysed by industry sector. 315

330 Presentation/Disclosure Requirement Preliminary announcements of annual results Main board listed entities App LR 13.49(1) On the next business day after the date of board approval of the preliminary results (and in any event, not later than 4 months after the end of the financial year), the entity is required to publish its preliminary results for the financial year. Notes: LR 13.49(2) 1. The preliminary announcement of result should be based on the entity s financial statements which have been agreed by the auditor. LR If the entity fails to publish the periodic financial information on time, the SEHK will normally require suspension of trading in the entity s securities. Transitional Provisions on abolition of Paid Announcements in Newspapers 1. Previously, Main Board listed entities were required to publish the preliminary announcement in the newspapers. 2. To allow more timely dissemination of entity s announcements to the market and to align the Main Board practice with GEM practice, the SEHK abolished the requirement for paid announcements and introduced mandatory electronic submission on 25 June Listed entities are required to submit the announcements to SEHK electronically through SEHK s e- Submission System. At the same time, the entities need to publish the full announcement in their own website. 3. To effect an orderly transition to the new regime, listed entities are required to publish a notification in newspapers to inform investors the publication of announcement on the SEHK website and their own website in the first six months till 24 December On the other hand, a listed entity without its own website has to publish the full announcement in the newspapers as well as on the SEHK website in the first twelve months till 24 June Thereafter, it is required to have its own website on which it publishes announcements in addition to publication on the SEHK website. LR 13.49(3)(i) In circumstances where the entity is unable to make such a preliminary announcement of results, the entity is required to make an announcement within 4 months after the end of the financial year containing: (c) Note: a full explanation for its inability to make an announcement based on financial statements which have been agreed with the auditor; the expected date of announcement of the financial results for the financial year which should have been agreed with the auditor; and so far as the information is available, results for the financial year based on financial results which have yet to be agreed with the auditor. If the entity s audit committee has reviewed and, however, disagreed with an accounting treatment, disclose full details of such disagreement. 316

331 LR 13.49(3)(ii) Presentation/Disclosure Requirement If the entity makes an announcement in accordance with LR 13.49(3)(i) (see above), then, as soon as the financial results for the financial year have been agreed with the auditor, the entity should: make a preliminary announcement of results based on the financial statements which have been agreed by the auditor; and set out full particulars of, and reasons for any material difference between the results agreed with the auditor and the one published in accordance with the rule set out in LR 13.49(3)(i) (see above). Information to accompany preliminary announcement of annual results LR 2.14 App The entity should include in the announcement, the name of each director at the date of the announcement of annual results. The following details, as extracted from the financial statements, should be included in the preliminary announcement of annual results: App 16.45(1) the disclosures specified for the balance sheet and the income statement (Note 1 to 3 below), with comparative figures for the immediately preceding financial year, including the notes relating to turnover, taxation, earnings per share, dividends and any other notes that the directors consider necessary for a reasonable appreciation of the results for the year; 317

332 Presentation/Disclosure Requirement Notes: App 16.4(2) 1. Disclosures specified for the balance sheet: fixed assets; current assets: (i) (ii) (iii) (iv) inventories; debtors, including credit policy and aged analysis of accounts receivable; cash at bank and in hand; and other current assets; (c) current liabilities: (i) (ii) borrowings and debts; and aged analysis of accounts payable; (d) (e) (f) (g) (h) net current assets (liabilities); total assets less current liabilities; non-current liabilities - borrowings and debts; capital and reserves; and minority interests. App 16.4(1) 2. Disclosures specified for the income statement: (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) turnover; profit (or loss) before taxation; taxation on profits (Hong Kong and overseas) in each case indicating the basis of computation; profit (or loss) attributable to minority interests; profit (or loss) attributable to shareholders; rates of dividend paid or proposed on each class of shares (with particulars of each such class) and amounts absorbed thereby (or an appropriate negative statement); earnings per share; investment and other income; cost of goods sold; interest on borrowings; depreciation/amortisation; profit (or loss) on sale of investments or properties; and (m) share of profit (or loss) of associated companies and jointly controlled entities attributable to equity holders (i.e. after tax and minority interests in the associated companies and jointly controlled entities). App 16.4(3) 3. Segment information required by HKAS 14, IAS 14 or relevant accounting standards under US GAAP (where applicable) for the balance sheet and income statement. 4. The directors should ensure the information contained in the preliminary announcement of results is consistent with the information to be contained in the annual report. 318

333 Presentation/Disclosure Requirement App 16.45(2) particulars of any purchase, sale or redemption by the entity, or any of its subsidiaries, of its listed securities during the relevant year, or an appropriate negative statement; App 16.45(3) (c) a business review which should cover the following information: (i) (ii) (iii) a fair review of the development of the business of the entity and its subsidiaries during the financial year and of their financial position at the end of the year; details of important events affecting the entity and its subsidiaries which have occurred since the end of the financial year; and an indication of likely future developments in the business of the entity and its subsidiaries; App 16.45(4) (d) any supplementary information which in the opinion of the directors of the entity is necessary for a reasonable appreciation of the results for the relevant year; App 16.45(5) (e) a statement as to whether the entity meets the code provisions set out in the Code on Governance Practices contained in App 14. The entity should also disclose any deviations from the code provisions and give considered reasons for such deviations. To the extent that it is reasonable and appropriate, such information may be given by reference to the immediately preceding interim report or to the Corporate Governance Report in the immediately preceding annual report, and summarising any changes since that report. Any such references must be clear and unambiguous. App 16.45(6) (f) a statement as to whether or not the annual results have been reviewed by the audit committee of the entity; App 16.45(7) (g) where the auditor s report on the entity s annual financial statements is likely to be qualified or modified (whether or not it is also likely to be qualified), details of the qualification or modification; and App 16.45(8) (h) where there are any significant changes in accounting policies, a statement to that fact must be made. App 16 Note 45.2 Note: The entity should apply the same accounting policies consistently except where the change in accounting policy is required by an accounting standard which came into effect during the financial year. GEM listed entities GR On the next business day after the date of board approval of the preliminary result for the financial year (and in any event, not later than 3 months after the end of the financial year), the entity is required to publish on the GEM website a preliminary announcement in respect of its results for the year. Note: The preliminary announcement of result should have been agreed with the entity s auditor. 319

334 Presentation/Disclosure Requirement Information to accompany preliminary announcement of annual results GR The following details, as extracted from the financial statements, should be included in the preliminary announcement of annual results: GR 18.50(1) the disclosures specified for the balance sheet and the income statement (see Notes 1 to 3 to the previous subsection Information to accompany preliminary announcement of annual results (applicable to Main Board listed entities), with comparative figures for the immediately preceding financial year, including the notes relating to turnover, taxation, earnings per share, dividends and any other notes that the directors consider necessary for a reasonable appreciation of the results for the year; Note: The directors should ensure the information contained in the preliminary announcement of results is consistent with the information to be contained in the annual report. GR 18.50B(1)(l) the movement of profit (loss) to and from any reserve; GR 18.50(2) (c) a business review which should cover the following information: (i) (ii) (iii) a fair review of the development of the business of the entity and its subsidiaries during the financial year and of their financial position at the end of the year; details of important events affecting the entity and its subsidiaries which have occurred since the end of the financial year; and an indication of likely future developments in the business of the entity and its subsidiaries; GR 18.50(4) (d) particulars of any purchase, sale or redemption by the entity, or any of its subsidiaries, of its listed securities during the financial year as required by GR18.14 (see above) or an appropriate negative statement; GR 18.50(5) (e) any supplementary information which in the opinion of the directors of the entity is necessary for a reasonable appreciation of the results for the relevant year; GR 18.50(6) (f) a statement as to whether the entity meets the code provisions set out in the Code on Governance Practices contained in GR App 15. The entity should also disclose any deviations from the code provisions and give considered reasons for such deviations. To the extent that it is reasonable and appropriate, such information may be given by reference to the immediately preceding interim report or to the Corporate Governance Report in the immediately preceding annual report, and summarising any changes since that report. Any such references must be clear and unambiguous; GR 18.50(7) (g) a statement as to whether the annual results have been reviewed by the audit committee of the entity; GR 18.50(8) (h) where the auditor s report on the entity s annual financial statements is likely to be qualified or modified (whether or not it is also likely to be qualified), details of the qualification or modification; and GR 18.50(9) (i) where there are any significant changes in accounting policies, a statement to that fact must be made. GR 18.50(9) Note 1 Note: The entity should apply the same accounting policies consistently except where the change in accounting policy is required by an accounting standard, which came into effect during the financial year. 320

335 Thinking in many areas of financial reporting is still new and developing, and new and revised standards and interpretation will continue to emerge. The Deloitte IAS Plus website, which is maintained by Paul Pacter (based in Hong Kong), provides the most comprehensive information on the Internet about international financial reporting. It is aimed at accounting professionals, businesses, financial analysts, standard-setters and regulators, and accounting educators and students. The site, which is totally free of charge, has a broad array of resources about the International Accounting Standards Board and International Financial Reporting Standards, including: a news page (updated almost daily). Day-by-day past news back to December 2000; detailed summaries of all Standards and Interpretations; e-learning modules for each IAS and IFRS made available at no charge; model IFRS financial statements and disclosure checklists; downloadable Deloitte publications relating to IFRSs (over 60 publications available); background and updates on all IASB and IFRIC agenda projects, including decision summaries of all IASB meetings; comparisons of IFRSs and various national GAAPs; a complete history of the adoption of IFRSs in Europe, with links to all the relevant documents; a complete history of the changes in the financial reporting framework in Hong Kong and related HKFRSs publications; updates on the development of accounting standards in the PRC, Chinese translation of IFRS publications, as well as a link to the recently launched Chinese language website devoted to Chinese Accounting Standards; information about adoptions of IFRSs elsewhere around the world; updates on national accounting standards development in over 75 countries throughout the world; a resource library of important documents relating to IFRSs; description of the IASB structure, component bodies, and key organisations with which it interrelates; history of the IASB, including a comprehensive chronology; links to nearly 200 global IFRS-related websites; even some tools to help in your work, such as world time clock, 9-year calendar, unit conversions, amortisation calculator, telephone codes, currency converter, stock market indexes, worldwide weather, and a calculator; and 5,400,000 visitors through September

336